5 Types of Dividend Issued by a Company (with Examples)
The following types of dividends provide an outline of the most common dividends. It is impossible to provide a complete set of examples that address every variation in every situation since there are can be many varieties of dividends. Each type of dividend states the topic, the relevant reasons for such payments, additional comments as needed along with practical examples.
Following are the list and details of the various common types of dividends which a company can issue –
List of Most Common Types of Dividends
Type #1 – Cash Dividend
This is the most common type of dividend under which there is the actual payment of the cash by the company to its shareholders directly. Generally, the shareholder’s payment is done electronically but the same may be given in the form of cash or check. Thus this type of dividend is the which board of director of the company resolves to pay on the date of declaration to the investors who are holding the stock of the company on the specified date.
The date when the dividends are assigned by the company to its stockholders is known as the dividend date of record and the date on which the dividend payments are issued by the company to its stockholders is known as dividend date of payment.
Example of Cash Dividend
Midterm international Ltd on January 1, 2019, held the meeting on which board of directors of the company declared the cash dividend of $1 per share on outstanding shares of the company which is to be paid to all the shareholders on June 1 who were there on record on April 1. The total outstanding shares of the company are $3,000,000. On January 1, 2019, the entry that will be recorded by the company will be:
Now on June 1, 2019, when Midterm international Ltd pays the dividends it will record the transaction and pass the below entry:
Type #2 – Stock Dividend
This is the type of dividend under which the company issues the common stock to the present common shareholders without taking any form of consideration. The treatment of the stock dividend depends on the percentage of an issue with respect to the number of the total previous share issue. If the issue is less than the 25 percent, then the transaction will be treated as the stock dividend whereas if an issue is more than 25, then it will be treated as the stock split.
In order to record this type of dividend, an amount will be transferred from the retained earnings account to the capital stock account with the par value and to the additional paid-in capital account for an additional amount to make the total amount equal to fair value of issued additional shares. The additional shares fair value will be based on the fair market value of share present on the declaration of the dividend.
Example of Stock Dividend
Midterm international Ltd on January 1, 2019, declares the stock dividend of 20,000 shares to the shareholders when the par value of the shares is $2 and the fair market value is $3.00, and its par value is $1. ABC records the following entry:
Type #3 – Property Dividend
Rather than giving a cash dividend or stock dividend to the investors, the company may give a non-monetary dividend. The company, in that case, has to record the distribution of non-monetary dividend at distributed asset’s fair market value. In case the fair market value of the assets distributed is different from the book value of assets, then the company has to record the variance in form of the gain or loss as applicable in the case.
So by this company has to option to not to pay the dividend only in the form of cash or the stock as it can pay in form of other assets like physical assets, real estate, investment securities, etc. Sometimes the company deliberately uses this method as property dividend may help the company to alter its taxable income.
Example of Property Dividend
The board of directors of New Sports International Ltd elects to declare the issuance of 1000 identical artwork which was stored by the company from last many years. The fair market value of the artwork on the date of declaration of the dividend is $ 6,000,000 which originally the company acquired $ 80,000. The entry to be passed by the New Sports International Ltd on the date of dividend declaration for recording change in assets value and liability to pay dividends is as follows:
Entry for recording the gain:
Gain = $ 6,000,000 – $ 80,000 = $ 5,200,000
Entry to record the liability of dividend
Entry for recording the payment of the dividend on the date of payment of dividend:
Type #4 – Scrip Dividend
This is the type of dividend under which the Company issues the scrip dividend in a case as per the situation it is prevailing that in near future company might not have sufficient funds for issuing the dividends. Thus this type of dividend is a promissory note to pay the shareholders of the company at the later date. This scrip dividend creates the note payable which may include interest or may not include.
Example of Scrip Dividend
The Mid Term International declares to its shareholders a $ 150,000 scrip dividend with the interest rate of 10 percent. The entries to record the dividend and its payment is as follows:
Entry on the date of declaration of the dividend:
Now suppose the payment date is after one year so Mid Term International has to pay the notes payable amount declared as dividend along with the interest accrued during the one year period from the date of declaration of a dividend to the payment of the same.
Interest Accrued = $150,000 * 10% = $15,000
On payment date entry will be:
Type #5 – Liquidating Dividend
This type of dividend is where the originally contributed capital is returned back to the shareholders mainly at the time of shutting down of the business.
Example of Liquidating Dividend
The board of directors of New Sports International Ltd declares the liquidating dividend of $ 1,000,000
The entry to record the declaration of dividend:
The entry to record the payment of dividend:
This has been a guide to the Dividend Types. Here we discuss the list of most common types of dividends including cash dividend, stock dividend, property dividend, scrip and liquidating dividend along with examples. You can learn more about financing from the following articles –