Dividend Definition – Types, Example and Importance

dividend definition

Dividend Definition, Types and Example

Dividend Definition – A payment (usually issued quarterly) to the stockholders of a company, as a return on their investment.

It is a portion of organization’s earning that it has decided to distribute among the shareholders. Company made payment of dividend in two forms – cash and stock. Shareholders get the dividend on the basis of the number of shares they hold in the company.

Usually, those companies provides dividend who will not reap enough profit after reinvesting their earnings. So they distribute as a dividend to the shareholders. In addition to this, companies also provide dividend in order to attract those investors who wants steady income. This is done, so that shareholders hold the shares for a longer period of time.

Types of Dividend

There are mainly five ways in which company provides the dividend.

Cash Dividend – When the firm gives the dividend in cash, then it is known as cash dividend.

Stock Dividend – Well, in this case, the organisation provides the additional shares to the existing shareholders. There is no transfer of any value. Only the number of shares a shareholder owns increases.

Scrip Dividend – The company instead of paying dividend, gives a promissory note that it will pay dividend on some later date.

Property Dividend – When company pays the dividend in the form of some asset such as product the firm produce, is known as property dividend.

Dividend Example

To understand the dividend definition more clearly, let’s discuss an example.

Let’s assume, X is a shareholder of ABC company who owns 1000 shares of it @ 100 each. Now the company decides to give the dividend to its shareholders which is Rs 2 per share. Calculate the dividend of shareholder X.

Dividend = 1,000 × 2

= 2,000

Related Financial Terms of Dividend

Importance of Dividend – Why Dividend is Used?

Each and every investors has different perspective while investing in some company. Some investors need steady income and some wants to earn huge profits. Investors who are in their retirement age see it as a source of income. One can earn from share only if she/ he sells the share.

Secondly, to create a cordial relationship between the company and investors, it is important that company give dividend. This provide a psychological advantage to the company. As company who provides for dividend are seen as financially good company which are making huge profits.

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