DIVIDEND, the net profit periodically divided among the proprietors of a joint stock company or corporation in proportion to their respective holdings and as determined by the class of their holdings. From Lat. dividendum, a thing to be divided.
Dividend is not interest, although the word dividend is fre quently applied to payments of interest ; and a failure to pay dividends to shareholders does not, like a failure to pay interest on borrowed money, lay a company open to being declared bank rupt. In bankruptcy a dividend is the proportionate share of the proceeds of the debtor's estate received by a creditor. In Eng land, the Companies Acts provide that no dividend shall be pay able except out of the profits arising from the business of the company, but, in the case of companies incorporated by special act of parliament for the construction of railways and other pub lic works which cannot be completed for a considerable time, it is sometimes provided that interest may during construction be paid to the subscribers for shares out of capital. Dividends (ex cluding occasional distributions in the form of shares) are ordinarily payable in cash.
Most companies di vide their capital into at least two classes, called "preference" shares and "ordinary" shares, of which the former are entitled out of the profits of the company to a preferential dividend at a fixed rate, and the latter to whatever remains after payment of the pref erential dividend and any fixed charges. Before, however, a divi dend is paid, a part of the profits is often carried to a "reserve fund." The dividend on preference shares is either "cumulative" or contingent on the profits of each separate year or half year. When cumulative, if the profits of any one year are insufficient to pay it in full, the deficiency has to be made good out of sub sequent profits. A cumulative preferential dividend is sometimes said to be "guaranteed," and preferential dividends payable by all English companies registered under the Companies Acts 1862 to go8 are cumulative unless stipulated to be otherwise. There is a growing practice of issuing "deferred" shares which are en titled to no dividends until prior classes of shares receive speci fied rates of dividend; their speculative character makes them popular and they often stand at high premiums.
Certain British public companies are forbidden by statute to pay dividends in ex cess of a prescribed maximum rate, but this restriction has.been happily modified in some instances, notably in the case of gas companies, by the institution of a sliding scale, under which a gas company may so regulate the price of gas to be charged to consumers that any reduction of an authorized standard price entitles the company to make a proportionate increase of the authorized dividend, and any increase above the standard price involves a proportionate decrease of dividend.
Dividends are usually declared yearly or half-yearly; and be fore any dividend can be paid it is, as a rule, necessary for the directors to submit to the shareholders, at a general meeting called for the purpose, the accounts of the company, with a re port by themselves on its position and their recommendation as to the rate of the dividend. And they have power to pay on account of the dividend for the year, without consulting the shareholders, an "interim dividend," which on ordinary shares is generally at a much lower rate than the final or regular dividend.
An exceptionally high dividend is often distributed in the shape of a dividend at the usual rate supple mented by an additional dividend or "bonus." Payment of divi dends is made by means of cheques sent by post, called "dividend warrants." All dividends are subject to income-tax, and by most companies dividends are paid "less income-tax," in which case the tax is deducted from the amount of dividend payable to each proprietor. When paid without such deduction a dividend is said to be "free of income-tax." In the latter case, however, the com pany has to make provision for payment of the tax before declar ing the dividend, and the amount of its divisible profits and the rate of dividend which it is able to declare are consequently to that extent reduced. In respect of consols and certain other securities, holders of amounts of less than ii,000 may instruct the Bank of England or Bank of Ireland to receive and invest their dividends.
With few exceptions, the prices of securities dealt in on the London Stock Exchange include any accruing dividend not paid up to the date of purchase. At a certain day, after the dividend is declared, the stock or share is dealt in on the Stock Exchange as ex dividend (or "xd"), which means that the current dividend is paid not to the buyer but to the previous holder, and the price of the stock is lower to that extent. The expression "cum divi dend" is used to signify that the price of the security dealt in includes a dividend which, in the absence of any stipulation, might be supposed to belong to the seller of the security. On the New York Stock Exchange the invariable practice is to sell stock with the "dividend on" until the company's books are closed, after which it is usually sold "ex dividend." The bonus dividend is designated as an extra dividend; it may be paid in cash or stock. (See STOCK EXCHANGE; CUM DIVIDEND.)
