AEM324 - Dividends and dividend policy

AEM324 - Dividends and dividend policy - Chapter 18...

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Chapter 18 Dividends and dividend policy Dividends : cash paid out of earnings; direct payment by corporation to its shareholders o If cash is paid out of sources besides current or accumulated retained earnings, it is called distribution (also known as a liquidated dividend = dividend from capital) Four types of dividends o Regular cash dividends : a cash payment made by a firm to its owners in the normal course of business, usually four times a year o Extra cash dividend : by calling this additional payment extra, management is indicating that the “extra” part may or may not occur again in the future o Special dividend : similar to extra dividend, but this is typically viewed as a truly unusual or one-time event that will not be repeated o Liquidating dividend : some or all of the business has been liquidated or sold off However the dividend is labeled, it is a payment that reduces corporate cash and retained earnings, except in the case of the liquidating dividend, which may reduce paid-in capital When a dividend is declared it becomes a debt of the firm and cannot be rescinded easily; distributed to all shareholders at a specific date Mechanics of a dividend payment : o Declaration date is the date on which the board of directors passes a resolution to pay a dividend o Ex-dividend date is the date two business days before the date of record, establishing those individuals entitled to a dividend If you buy a stock before this date you are entitled to the dividend If you buy a stock on or after this date the previous owner will get the dividend Because the dividend is valuable, the stock price is affected when the stock goes “ex” A stock price will usually drop by about the value of the dividend per share, however this number tends to be slightly less, based on the tax on the dividend o Date of record is the date by which a holder must be on record to be designated to receive a dividend o Date of payment is the date on which the dividend checks are mailed Example: the Microsoft special dividend was so enormous that it accounted for a 3.7 percent rise in personal income in the month of December, when it was paid o The dividend payment accounted for 3 percent of all personal income in the United States for a month Dividend policy : the time pattern of dividend payout; also, the amount paid out Homemade dividend policy : a stockholder can alter a firm’s dividend policy to suit themselves o Can reinvest the dividends or sell shares of stock in order to achieve their goals regardless of the firm’s dividend policy
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o Some firms assist their stockholders in creating these homemade policies by offering automatic dividend reinvestment plans (ADR’s or DRIP’s) Stockholders have the option of automatically reinvesting some or all of their cash dividend in shares of stock; in some cases they even receive discounts on the stock, making the plans very attractive Real world factors favoring a low payout
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AEM324 - Dividends and dividend policy - Chapter 18...

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