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Stock Dividend Policy
There are several different types of dividends. The basic types of cash
dividends are:
- Regular cash dividends
- Extra cash dividends
- Special dividends
- Liquidating dividends
Other types of dividend options include:
- Stock dividends
- Stock split/reverse stock split
- Stock repurchase option
The most common type of dividend is a cash dividend. Typically, public
companies pay regular cash dividends four times a year. As the name
suggests, these are cash payments made directly to shareholders, and they
are made in the regular course of business.
Sometimes, firms will pay regular cash dividends and an extra cash
dividend. By calling part of the payment "extra", management is
indicating that part of the dividend may or may not be repeated in the
future.
A special dividend is similar, but as the name indicates, this dividend
is viewed as truly unusual, or a one-time event that will probably never be
repeated. This type of dividend is given when the company receives a
very unexpected windfall, such as a major lawsuit settlement.
The payment of a liquidating dividend usually means that some or all of
the business has been liquidated, or sold off. The money from the sale
is distributed to the owners or shareholders in the form of dividends.
Another type of dividend is paid out in shares of stock. This type of
dividend is called a stock dividend. A stock dividend is not really a
true dividend, because it is not paid. The effect of a stock dividend
is to increase the number of shares that each owner holds. Since there
are more shares outstanding, each share is simply worth less.
A stock split is essentially the same thing as a stock dividend.
When a stock split is declared, each share is split up to create additional
shares. For example, in a tree-for-one split, each old share is split
into three new shares.
A less frequently used financial maneuver is a reverse stock split.
In a one-for-three reverse split, each investor exchanges three old shares
for one new share. The new share is now worth the same as the there
old shares combined. The company's financial statements do not change,
and the value of the investment does not change. The reasons why a
firm would execute a reverse split are as follows: (1) in having fewer
shares, the transaction costs of buying and selling will be less for
investors; or (2) potential investors like to see the price of shares
within a certain range.
Some markets, like the NYSE, require a corporation's stock to be above a
minimum price in order to be traded on their exchange.
An alternative to paying a cash dividend is the stock repurchasing
option. Stock repurchasing has become a major financial option in
recent years and will likely continue to be an alternative to cash
dividends. There is literally no major effect on the company or the
investor when the company chooses a stock purchase versus a cash dividend.
The outflow of money is the same, whether the company gives dividends or
repurchases an equivalent amount of stock from the marketplace. For
shareholders, theoretically, the market value of their stock goes down equal
to the amount of the cash dividend, thus having no effect on the investors'
total worth.
Example:
If the XYZ company is worth 1 million dollars and has 100,000 shares
outstanding, then the stock value is $10 per share ($1,000,000 / 100,000
shares=$10). If you have 100 shares of XYZ Corporation, and the stock
is currently worth $10 per share, your worth in this company is $1,000 (100
shares x $10= $1,000). Now, if the company decides to pay a $1
dividend ($1 x 100,000 shares), then the company will be worth $100,000
less, or $900,000 less ($1,000,000 - $100,000). The value of each
share is now worth $9 ($900,000 / 100,000 shares = $9 each). Investors
now have 100 shares worth $9 each (100 shares x $9 = $900) plus $100 in cash
from dividends, for a total of $1,000.
If the company opted for a stock repurchase of $100,000, then the company
would be worth $900,000, and they would buy back 10,000 shares, making the
value of each share now $10 ($900,000 net worth / 90,000 shares = $10
per share). Thus, if you owned 100 shares as an investor, your
worth in this company is the same (100 shares x $10= $1,000). The only
difference to shareholders with a stock repurchase is that they don't
have to pay the extra income tax. For the corporation, we can view the stock
repurchase option as the company getting "leaner and meaner".
Activity
Create a graphic organizer that shows the 5 types of dividends and explains
each type. Use Inspiration or Word.
Group Activity Pick 15-20 companies and
research their dividend history. Create a spreadsheet showing all 20
companies and their dividend history from 2007. |
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