What is a Dividend

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What is a Dividend?

The Dividend is profits of trending company distributed amongst members in proportion to their shares.

The Portion of the profit which is distributed to the shareholders at the end of the financial year is not fixed. It varies from year to year and from company to company. It should be remembered that dividends are a part of the profits of the company. it should never be paid out of the capital of the concern.

The directors of the company have a wide power to determine the rate of dividend at the end of a trading year . They may decide to divide the whole profits among the shareholders or keep a certain percentage of profits as reserve fund or may not distribute the profit at all and allow it to be credited to the reserve fund for meeting the expansion needs of the company.

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The shareholders, however, desire that they should get a fair return on the amount invested in the company. The successful company follows a policy of declaring a low but a regular rate of dividend to the shareholders.

In prosperous years, they credit a bigger parentage of profits to the Reserve Fund. This fund is then used to pay the dividend at a regular rate in times of lower earning of the company.

Legal rules as regard to payment of dividend:

  1. A company subject to the provision of articles should pay the dividend to the shareholders out of profit in proportion to the shares.
  2. A dividend becomes the liability from the date; it is declared by the company and should be paid within 45days of the date of declaration.
  3. The dividend should be paid out of the profits of the company and not out of the capital.
  4. It is not necessary to divide the whole of profits among the shareholders. a certain percentage as decided by the directors can be transferred to the reserve Fund of the company
  5. The dividend must be paid in cash unless there is an express authority to pay them in shares or debentures.
  6. Dividend payable on ordinary shares may vary according to the profits made by the company every year.
  7. Directors who are a party to the payment of dividend on capital of the company are jointly responsible for repaying the amount.
  8. The dividend on the bearer share is paid on the production or a coupon to the bankers of the company. The registered shareholders get the payment of the dividend by means of a dividend warrant from the company bankers.

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