Definition of Dividend in Accounting Including Its Types, & Policy Theories

What is a dividend? Definition of Dividend is a form of distribution of profits to shareholders in a certain period based on the number of shares owned. That is, the amount of the dividend depends on the size of the shares of each owner.

There are also those who say the meaning of dividends is a payment made to shareholders that comes from the company’s profits. Dividend policy is very influential on profits and cash in the company and tends to benefit shareholders if it is not managed with the right policies.

A company may not distribute dividends with the aim of using profits to expand or develop a business. However, companies generally issue dividends to increase shareholder confidence in the long run, and attract new investors who are looking for sources of fixed income.

Definition of Dividends According to Experts

Some experts in the field of economics accounting have explained what dividends mean, they are.

1. Scott Besley and Eugene F. Brigham

According to Scott Besley and Eugene F. Brigham (2005), the definition of dividends is the distribution of cash to shareholders from company profits, whether profits derived from the current period or profits from the previous period.

2. Baridwan

According to Baridwan (1997), the definition of dividends is part of the profits distributed to shareholders whose amount is in accordance with the number of shares owned by the shareholders. The amount of dividends obtained by shareholders can change from the previous year, according to the amount of profit in the following year.

3. Nikiforos K. Laopodis

According to Nikiforous (2013), the definition of dividends is cash payments made by the company to shareholders. The dividend represents the shareholders of direct or indirect income from their investment in the company.

4. Jamie Pratt

According to Jamie Pratt (2011), the definition of dividends is the distribution of cash, property, or shares to the shareholders of a company. This dividend is stated by the official resolution of the corporation’s board of directors every quarter, and the amount is announced on a per share basis.

5. Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso

According to Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso (2011), the definition of dividends is the distribution made by the company to shareholders proportionally according to share ownership. In other words, investors only receive profits according to the percentage of their investment in the company.

Types of Dividends in Business

In general, dividends in businesses and companies are divided into several types based on the method of distribution. Referring to the definition of dividend above, here are some kinds of dividends in business:

1. Cash Dividends

Cash Dividend is a method of payment of profits in cash and is taxed only in the year of expenditure.

2. Stock Dividends

Stock Dividend is a dividend distribution method which is done by increasing the number of shares but reducing the value of each share in order not to change market capital.

3. Property Dividend

Property Dividend is a method of distributing dividends paid through assets such as property businesses, but this method is rarely used in business.

4. Interim Dividend (Interim Dividend)

Interim dividends are dividends that are announced and paid before the company has finished posting annual profits.

5. Debt Dividends (Scrip Dividend)

Dividend Scrip is a distribution of dividends to shareholders in the form of a written promise in which the company will pay cash in the future. Scrip dividends can be in the form of interest or no interest, and can be traded to other shareholders.

6. Liquidating Dividend (Liquidating Dividend)

Liquidation Dividends are dividends issued when the board of directors conduct business liquidation and return all remaining net assets to shareholders in cash.

Dividend Policy Theory According to Experts

1. Dividend Theory Is Not Relevant

According to Modiglani and Miller, the value of a company is not determined by the size of the Dividend Payout Ratio , but is determined by net income before taxes and the risk class of the company.

In other words, the company’s ability to generate profits from company assets is a determinant of the company’s value.

2. The Bird in The Hand Theory

According to Linter and Gordon, when the Dividend Payout is low, the company’s own capital costs will increase. This is because investors prefer dividends over capital gains .

3. Tax Difference Theory

Dividend policy theory according to Litzenberger and Ramaswamy, tax is applied to dividends and capital gains . However, investors prefer capital gains because shareholders can delay tax payments .

4. Theory of Signaling Hypothesis

There is empirical evidence that says that if there is an increase in dividends it will be accompanied by an increase in share prices. Likewise with the opposite. This is another reason why investors prefer dividends over capital gains.

5. Clientele Effect Theory

According to this theory, shareholders have a different perspective on a company’s dividend policy. High Dividend Payout Ratio is preferred by investors who need income now. While investors who do not really need the money right now would prefer if the company retained most of the company’s net profit.

Effect of Dividend Policy on Business Risk

Newly developing companies are very vulnerable to increased debt. The greater the ratio of debt to total assets of the company, the greater the potential risk. This can result in financial distress.

1. Dividends Become a Source of Conflict

Dividend payment policy can be one source of conflict between lenders and shareholders and the results can lead to agency cost of debt.

2. When the Dividend is Abolished

Restricted dividends in company debt agreements can risk the low conversion of dividends due to companies experiencing difficulties in sourcing funds or corporate cash.

Company managers often negate dividends, even though it will be a burden on companies to pay more to shareholders than when they distribute dividends in low amounts.

Eliminating dividends is a bad choice for a company that has financial difficulties, because shareholders may feel disadvantaged and ask for a bigger share.

3. When the Dividend is Increase

Companies that increase dividends for investors even though the debt is very high, can be a negative perspective for these investors. This is because the alleged dividends provided come from the issuance of forests or other investment funds by ignoring the interests of debt payments. Of course this makes the company vulnerable to the risk of bankruptcy.

4. The Attraction of Dividends

Companies that can provide large dividends with little debt dependents can be an attraction for other investors. The company will be judged to have the moral and financial ability to properly manage the company without the bondage of debt.

Businesses or companies that have good financial management allow greater profits due to lower production costs.

5. Invest in Dividends

Business can also influence the determination of dividend distribution policies. Profitability often results from the use of fixed operating costs with increased sales.

Companies often invest in profits to further increase profits in the future. Though this causes a reduction in company funds so that investors get low dividends.

The dividend policy dilemma often becomes an obstacle for company leaders. Dividends cannot be decided solely from the company’s finances, but must also consider the risks that can be caused.

Above was a brief explanation of the definition of dividends in accounting, types, and policy theory. Hopefully this article is useful and broadens your horizons.

Dividend Calculation

Earnings of shares obtained by each shareholder have different nominal.

This is influenced by the number of shares owned by each shareholder.

In determining the nominal received by each shareholder, the company uses three basic elements of calculation, namely:

DIVIDEND PAYOUT RATIO

Dividend Payout Ratio (DPR) is the ratio of how much corporate profits are divided into dividends to shareholders. A simple example:

  • Net Income of ABC company is $100,000.
  • ABC company decided to distribute a dividend of $50,000 to shareholders.
  • DPR = 50,000 / 100,000 * 100% = 50%.

So, Dividend Payout Ratio (DPR) from ABC company is 50%.

** The more established the company, the more likely the company is to provide dividends with a large DPR **

DIVIDEND PER SHARE

Dividend Per Share (DPS) is dividend per share. This figure is obtained from the distribution of company dividends by the total number of shares.

A simple example:

  • ABC company decided to distribute a dividend of $ 500,000 to shareholders.
  • The total number of shares of PT. ABC is $1,000,000.
  • DPS = 500,000,000 / 1,000,000 = $. 500, -.

So, Dividend Per Share (DPS) / dividend per sheet received by shareholders is Rp. 500, –

** Do not bother with dividends per sheet and dividends. To find out the amount of dividends to be received, you only need to multiply the number of shares you have with dividends per share **

DIVIDEND YIELD

Dividend yield is a comparison of how much dividends the company divides against the price of shares that are in circulation.

A simple example:

  • DPS from ABC company is $2, -.
  • The stock price of ABC company is $100.
  • Dividend yield = 2 / 100 * 100% = 2%.

So, the dividend yield from PT. ABC is 2%.

** A large dividend payout ratio may not necessarily produce a large dividend yield **

** One of the things sought by investors who love dividends is a large dividend yield ratio **

Leave a Comment