The dividend is the proportion of profits or benefits that a company distributes among its shareholders.

The condition of shareholder is usually coupled with the economic right to receive it. That is, right to the dividend. Dividends represent the part of the profits that the company has obtained that are destined to remunerate shareholders

This concept is part of a company's liabilities, since it leaves its balance sheet in the form of profit distribution, encouraging shareholders to want to buy more shares in the company and, therefore, it can obtain financing.

The amount of the dividend must be approved at the General Shareholders' Meeting, at the proposal of the Board of Directors. Within the dividend distribution policy, the fundamental issue is the company's ability to generate profits and the risk it incurs to obtain them. Usually, when a company has many investment opportunities, the distribution of dividends decreases, since it has more sources of financing, although it is also true that it is not convenient to surprise shareholders with changes in the amount of these.

It is very common to calculate dividends using net profit and payout, which is the percentage that is used to pay dividends and remunerate shareholders.

Dividend = Net Profit * Payout

Let us imagine that a company has a net profit of 100 monetary units and has a payout 25%. The company will pay a dividend of:

Dividend = 100 * 25% = 25 currency units

Dividend types

In general, there are these kinds of dividends:

  1. Dividend on account: Dividend that is paid to the shareholder in his cash account as an advance of the profit obtained.
  2. Complementary dividend: It is the dividend that is added to the one delivered on account.
  3. Extraordinary dividend: They are the dividends that are distributed when there have been extraordinary benefits.
  4. Dividend in shares: The dividend is distributed in shares, instead of money.
  5. Fixed dividend: It is a dividend that the company sets, regardless of the profit obtained.

In addition, we can distinguish between gross and net dividends, depending on whether or not taxes on profits are included.

The applications of dividend policies can be:

  • Annual constant.
  • Fixed percentage on the profits of the exercise.
  • Arbitrary at the convenience of the company. For example, there may be a minimum dividend to which shares or dividends are added.

Finally, the company will establish the criteria to be entitled to receive dividends from the shareholder, indicating until what date the shares must be deposited and purchased in the portfolio. Generally, share prices tend to fall the day after the company's distribution of dividends.

Example of calculation of the dividend in accounting

Suppose the following data in euros for this company:

  • Profit to date (after discounting the effect payout): 50.000
  • Corporation tax (assuming a rate of 25%): -12,500
  • Endowment to reserves (Let's imagine it is 10%): -5,000
  • Loss compensation: -10,000

Maximum interim dividend: 50,000 - (12,500 + 5,000 + 10,000) = 22,500 euros

The 22,500 euros will be the maximum interim dividend that can be delivered.

According to the previous example, suppose that the company decides to pay in advance 20,000 euros of the maximum dividend that it is going to pay and, at the end of the year, decides to supplement its payment with the remaining 2,500 euros, distributing the final payment among its shareholders.

Tags:  economic-analysis accounting other 

Interesting Articles