4. Kinds of dividends.—Dividends may be paid out of either the assets or a dividend reserve previously created. Sometimes the initial losses sustained in or ganizing a corporation and bringing it to a profitable basis are entered as assets upon the books, in the form of good-will or organization expense, and conserva tive financial practice insists that such losses be made good out of income before any dividends are declared.
5. Cash dividends.—Dividends may be paid in cash, other property, script or capital stock. The cash dividend needs no comment. Property divi dends, however, are unusual and deserve mention. It sometimes happens that a company desires to pay dividends by the distribution of property other than cash. This is particularly true when a corporation, altho a dividend has been earned, desires to keep its cash and to dispossess itself of certain other prop erty which is available for distribution to stockholders. The most usual form of property dividend consists of securities of other companies which may be readily assigned to stockholders. Land, buildings and ma chinery do not readily lend themselves to distribution in this manner, altho dividends by the distribution of parcels of land or corporate products are not un known.
Since the outbreak of the European war, some cor porations, particularly those engaged in manufactur ing war materials, have paid part of their dividends to shareholders in the shape of government bonds. The Du Pont Company, for instance, in February, 1916, declared a special dividend of 22% per cent on the common stock, in addition to the regular quarterly dividend of 1% per cent. Dividends were payable 5 per cent in cash and 19 per cent in Anglo-French bonds, with coupons attached, at 95. The Canadian Fairbanks Morse Company took somewhat similar action in April, 1916. After providing for the pre ferred stock dividend, the 1915 balance available for distribution on the common stock was $619,048, as against a deficit of $191,099 in the previous year. Earnings on the common stock in 1915 were equal to 33.7 per cent. In view of the fact that common stock dividends, formerly at the rate of 8 per cent per an num, had to be discontinued in 1914, the directors, in addition to a cash dividend of 4 per cent paid during 1915, declared a dividend of 12% per cent payable in Canadian war loan bonds; a distribution of $200,000 in all.
Cash dividends come directly out of the bank ac count, and often necessitate short-term loans pending the receipt of assured income which will replenish the bank balance. Cash dividends should not be paid if the money is needed in the business, even tho divi dends are earned. Many a really successful and profitable concern has been forced into reorganiza tion by borrowing cash for the purpose of paying dividends when working capital was already too low.
6. Scrip dividends.—Scrip dividends are merely notes of the corporation paid out in lieu of cash. They are rarely justified and usually indicate finan cial difficulties. The issue of scrip does not differ in form from the capitalizing of earnings by the issue of bonds, except for the shorter term of scrip. Ordi narily it is better, when dividends have been earned but cannot be paid in cash, to declare stock rather than scrip dividends, if any dividends at all are paid.
7. Stock dividends.—The stock dividend consists of the issue of additional capital stock to the extent of the dividend. This capitalizes the profits of the concern and keeps the funds in the business. The stockholder realizes his dividend by selling the stock, or, by retaining it his dividend income may be in creased. When stock dividends have been declared, it is customary for the corporation to continue paying the former rate of cash dividend upon all the stock, which increases the stockholders' income by the amount of the annual dividend upon the new stock. The stock dividend is merely a compulsory subscrip tion to additional capital stock of the company, and is an indication of inadequate capital, concealed earn ings or excessive surplus.
8. Privileges.—Corporations whose stocks are drawing heavy cash dividends, and are therefore sell ing at a premium, will sometimes distribute dividends to stockholders in the form of privileges to subscribe to additional stock at par or at some stated figure above par. The difference between the subscription price and the market value of the stock represents a dividend to the stockholder, who may realize his profit by marketing the shares.