dividend

dividend, that part of the net earnings of a corporation that is distributed to its stockholders. Dividend disbursements are based on a percentage of the par value of the stock or are a certain sum per share of no-par-value stock. They become payable only when approved by the board of directors and are usually declared at regular intervals. Obviously, dividends should not be paid unless the company has accumulated a profit or surplus. In the United States, dividends may be paid in property of various kinds, including bonds and stocks of the company or stocks of other companies first acquired for other purposes, in notes, or in cash. Dividends may be paid in stocks when the accumulated profits of a company are to be retained for reinvestment in the business. Dividends in the form of notes, often called scrip dividends, are rare; they are only paid when the company has earnings that it expects to convert into cash before the notes are due. In Great Britain, dividends are payable only in cash. Liquidation dividends are the return of the capital of a business that is being terminated. Enterprises with diminishing assets, such as mines, issue a modified form of liquidation dividend. The dividend from preferred shares of stock is a fixed percentage that must be paid before the remainder of the profit is divided among other shares. If there are not enough profits to pay the whole dividend on preferred stock, future profits may be assigned to pay back those dividends before anything is paid on common stock. Preferred stock is ranked as first and second preferred, according to the priority of its obligations. Preferred dividends differ from interest on bonds in that there is no default if the former are not paid. The term dividend is also used to refer to a fractional payment of the amount owed by a bankrupt firm to a creditor.

The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2012, Columbia University Press. All rights reserved.

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