Dividend
Distribution of corporate profits to shareholders, often in cash.
Wikipedia / Wikimedia Commons
A dividend is a portion of a corporation's profit paid out to its shareholders. When a company makes money, it can choose to distribute some of that profit as a dividend, while the rest stays in the business as retained earnings. These payments can come from the current year's profit or from past retained earnings, but companies are generally not allowed to pay dividends from their capital. Dividends are usually given in cash, often via bank transfer, but if a company has a dividend reinvestment plan, they might be paid in extra shares or through share buybacks. Occasionally, assets are distributed instead. Shareholders treat dividends as income, which may be taxed, though tax rules vary by jurisdiction, and the company itself doesn't get a tax deduction for paying them.
Each share gets a fixed dividend amount, so shareholders receive payments in proportion to how many shares they own. Dividends can offer at least temporarily stable income and boost shareholder morale, but they are never guaranteed to continue. For a joint-stock company, paying dividends isn't an expense; it's just dividing after-tax profits among shareholders. Retained earnings appear in the shareholders' equity section of the balance sheet, alongside issued share capital. Public companies often follow a fixed schedule for dividends, but they can cancel a scheduled one or declare an unscheduled one—sometimes called a special dividend, which is usually a one-off higher amount paid alongside the regular dividend. Cooperatives, however, base dividends on members' activity, and these are often treated as a pre-tax expense. Payments to holders of preference shares are also classed as dividends. The word "dividend" comes from the Latin *dividendum*, meaning "thing to be divided."
**History** The Dutch East India Company (VOC) was the first recorded public company to pay regular dividends, doing so annually for almost 200 years, with payments worth about 18 percent of share value. In common law jurisdictions, courts have typically let directors decide on dividends without interference, as seen in cases like *Burland v Earle* (1902) and *Bond v Barrow Haematite Steel Co* (1902). However, in *Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd* (2013), the Supreme Court of New South Wales broke from this precedent, recognizing a shareholder's contractual right to a dividend.
**Forms of Payment** C
- field
- Corporate finance and shareholder returns
- known_for
- Distribution of corporate profits to shareholders
- first_recorded_payer
- Dutch East India Company (VOC)
- common_form
- Cash dividends
- tax_treatment
- Treated as shareholder income; corporation receives no tax deduction
Lore & Background
The Dutch East India Company (VOC) was the first recorded public company to pay regular dividends, paying annual dividends worth around 18 percent of the value of its shares for almost 200 years (1602–1800). In common law jurisdictions, courts have typically refused to intervene in companies' dividend policies, giving directors wide discretion. This principle of non-interference was established in cases such as Burland v Earle (1902) in Canada, Bond v Barrow Haematite Steel Co (1902) in Britain, and Miles v Sydney Meat-Preserving Co Ltd (1912) in Australia. However, in Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd (2013), the Supreme Court of New South Wales broke with this precedent and recognized a shareholder's contractual right to a dividend.
Reader's Guide
Dividends are a key mechanism for returning corporate profits to shareholders, providing at least temporarily stable income and raising morale among shareholders, though they are not guaranteed to continue. The dividend received by a shareholder is treated as income and may be subject to income tax, with tax treatment varying considerably between jurisdictions. The corporation does not receive a tax deduction for dividends it pays. For joint-stock companies, paying dividends is not an expense but a division of after-tax profits among shareholders. Retained earnings (undistributed profits) appear in shareholders' equity on the balance sheet. Public companies usually pay dividends on a fixed schedule but may cancel or declare unscheduled dividends. Cooperatives allocate dividends according to members' activity, often considered a pre-tax expense. The payout ratio, calculated as dividends per share divided by earnings per share, characterizes how much of a company's earnings is paid out; a ratio over 100% means the company paid more than it earned. Free cash flow can also be used to assess dividend safety. Key dates include the declaration date, ex-dividend date, and record date; the share price often decreases on the ex-dividend date by roughly the dividend amount.
Did You Know?
- The Dutch East India Company (VOC) was the first recorded public company to pay regular dividends, paying annual dividends worth around 18 percent of the value of its shares for almost 200 years.
- In common law jurisdictions, courts have typically refused to intervene in companies' dividend policies, but the Supreme Court of New South Wales broke with this precedent in 2013.
- A payout ratio greater than 100% means the company paid out more in dividends for the year than it earned.
- Stock dividends are not includable in the gross income of the shareholder for US income tax purposes.
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