The share of a company’s profit paid to a shareholder. The amount he or she receives will depend on the number of shares held. Unlike interest, dividends are optional payments made at the discretion of the directors – though failure to pay dividends will have an adverse effect on the market value of the shares as very few will be interested in purchasing a nonearning investment. Dividends may be of various kinds. Those paid to preference shareholders have priority, unless the company’s articles dictate otherwise, e.g. dividends on ordinary shares cannot be paid until the full entitlement of preference shareholders has been met. If the preference shares are ‘cumulative’, then arrears of that dividend must also be paid before any monies are distributed to ordinary shareholders. In the case of deferred shares dividends can usually only be paid after the demands of preference shares have been met and a stated percentage has been paid to the holders of ordinary shares.
Dividends are usually expressed as a percentage of the nominal value of the shares, whatever the category. The rate for preference shares is normally predetermined, being contained in the title of the shares, e.g. 5% preference shares. The rate paid on ordinary, and deferred, shares will depend on the funds available and the amount of profit that the directors see fit to distribute. Often it is paid in two or more instalments, known as interim and final dividends for a particular year. Dividends payable are declared at the annual general meeting of the company, though the directors may pay interim dividends on account of the total to be declared subsequently at the A.G.M. All dividends are subject to tax. This is paid by the company before distribution, leaving the recipient to reclaim or adjust tax where necessary by arrangement with the Inland Revenue. The fact that a shareholder may not be liable to tax is not the concern of the company.
The dividends paid by the Co-operative Society are slightly different both in entitlement and method of payment. Basically, they are repayments of a part of the Society’s profit to its members, who are also its customers. The amount any member receives will depend on the total of his purchases during the period under review.
Reference: The Penguin Business Dictionary, 3rd edt.