Question

List the types of dividends, and a brief description of each type of dividend. Why do companies or investors have a preference for one or the other?

Answer 1

A company may issue dividends of following types to it's stockholders:

1) Cash Dividend: In this the comapny shares a portion of its earnings in form of dividend in cash. It is most commonly used type of dividend and is preferred by the shareholders beacuse the sharesholders get direct cash in their accounts. For company it is possible when it has sufficiend amount of cash reserves and can effectively manage the outflow of cash.

2) Stock dividend (Bonus shars): In this instead of giving cash as dividend the company issues dividend in form of additional shares. such shares issued in place of cash dividend are known as bonus shares. It increses the shareholding of the investor and he/she can convert it into cash by selling the bonus shares. The company doesn't have a cash outflow in this case. Bonus shares are issued in a fixed ratio of existing shareholding.

3) Shares repurchase (Buyback) : shares buyback is the method in which the company uses its cash to buy back the shares from the shareholders and gives them cash as consideration for giving their shares back to the comapny. When a company buys back its own shares from the market it reduces the number of shares outstanding.

4) Dividend in kind (Property dividend): In this the company gives dividend in form of an asset other than cash ie. Vehicle, equipment etc.

5) Scrip Dividend: If the company doesn't have sufficient cash or doesn't want to give cash for dividend, it may also issue scrip dividend in which a promissory note is issued to pay the shareholders later.

6) Liquidating dividend: When a company returns the original capital contributed by the equity shareholders as a dividend, it is termed as liquidating dividend. It is often done by the comapnyif it is willing to wind up the businss.

Investors normally prefer Cash dividend or bonus shares because these give cash returns to the shareholders. Company may prefer any form of dividend considering the balance sheet conditions and the impact of dividends on it's financial position.

Hope it helps.