Question

Differentiate the different types of dividends that a company can pay and relate the impacts with the investor. (Also, consider the tax implications Include rationale for why a company might consider a stock split.

Answer 1

A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend.

Types of dividend :There are various types of dividends a company can pay to its shareholders.

Cash – this is the payment of actual cash from the company directly to the shareholders and is the most common type of payment.

Stock – stock dividends are paid out to shareholders by issuing new shares in the company. These are paid out pro-rata, based on the number of shares the investor already owns.

Assets – a company is not limited to paying distributions to its shareholders in the form of cash or shares. A company may also pay out other assets such as investment securities, physical assets, and real estate, although this is not a common practice.

Special – a special dividend is one that’s paid outside of a company’s regular policy. It is usually the result of having excess cash on hand for one reason or another.

Common – this refers to the class of shareholders (i.e., common shareholders), not what’s actually being received as payment.

Preferred – this also refers to the class of shareholders receiving the payment.

What Are The Long Term Effects?

Usually, large-cap companies manage to establish a fair market reputation through timely dividend payments of substantial amounts to all respective shareholders. It is a major contributing factor to the high share prices of such business ventures. On the other hand, small and mid-cap companies often choose to retain their profits for an extended period to increase their productive capacity, which, in turn, labels underlying equity shares as non-profitable investment ventures.As a result, stocks of such small and mid-scale businesses often trade at a relatively lower price. If you are looking to acquire an equity stake with the primary goal of extensive dividend earnings, it could prove fruitful to stick to the stocks of large-cap and blue-chip companies.

A stock split is a corporate action in which a company divides its existing shares into multiple shares. Basically, companies choose to split their shares so they can lower the trading price of their stock to a range deemed comfortable by most investors and increase the liquidity of the shares.