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Dividend is an entity´s earnings distribution among its shareholders. It normally has a periodical character. Individual part of earnings distributed among stockholders of a corporation or company in proportion to their holdings. Usually paid in cash, dividends may also be distributed in the form of additional shares of stock. Preferred stockholders receive a preferential dividend, usually at a fixed rate; common stockholders get a portion of what remains after payment of the dividends on preferred stock.

The amount of money will be determined by the total money that the entity is willing to distribute and the number of stocks in which the share capital, or equity capital, is divided into. Such a quantity must be approved in a shareholder´s meeting, keeping in mind that companies may not distribute all the capital they want among its shareholders. It is compulsory by law that a part of the benefit is obligatorily destined to reserves; therefore not the whole benefit may be distributed in the form of a dividend.

The distribution of dividends is very common of dividends in companies listed in stock markets. This distribution carries a disadvantage for the company because if such distribution among the shareholders is made, the company loses accounting value due to the fact that the distributed amount could have been part of the company’s equity. In some countries, obtaining dividends has advantages; shareholders do not pay taxes for revenues concerning dividends, they are exempt up to a limit. Under the US regulation, dividend tax must be paid; in many jurisdictions the government requires the company to withhold at least the standard tax, paying it to the national revenue authorities and paying the shareholders the balance.

There are several kinds of dividends:

  • Interim dividend: dividend that is both declared and paid before a company has determined its full-year earnings, allowing companies to provide it in one or various payments.
  • Complementary or supplementary dividend: dividend that is distributed at the end of the financial year after all other payments have been made. It is complementary to the interim dividend.
  • Extraordinary, bonus, or special dividend: it occurs as a consequence of an extraordinary fact, as for example, the sale of a subsidiary or a part of the company. Companies can also issue this kind of dividend when it wants to change its financing structure, for equity-based to debt-based. It is not repeated throughout years. Nowadays, there is another way to pay dividends; 
Exchanging dividends with the company´s stocks (stock dividend). This way the price of the stocks in the market decreases. If the company finds itself with not enough funds, it may issue promissory notes to pay shareholders at a later date (script dividend). When the board of director wants to return the capital invested in the company by the shareholders, it is called a liquidating dividend, and it is usually a precursor to shutting down the business.

There are also:
  •  Gross dividend: interim dividend + complementary dividend 
  •  Net dividend: Gross dividend -withholdings. It is the one that the shareholder actually receives once the fiscal retention is made.


What is a dividend yield? - MoneyWeek Investment Tutorials

What is a dividend yield? - MoneyWeek Investment Tutorials

What is a Dividend?

What is a Dividend?