Forms in Which Dividend Is Distributed
The dividends are classified according to the medium in which they are paid. Generally, dividend is paid in cash, but it may be in the form of shares (or stock), promissory notes, bonds or in the form of property. Thus dividend is payable in following forms:
(1) Cash Dividend.
(2) Stock Dividend (Bonus Shares).
(3) Optional Dividend.
(4) Scrip (Promissory Note) Dividend.
(5) Bond (Security) Dividend.
(6) Property Dividend.
CASH DIVIDEND: It is generally believed that dividend means cash dividend. Most of the investors on wish that the company should pay dividend in cash only, which they may use for consumption purposes. Mostly companies pay dividend in cash only. According to Indian Companies Act also dividend is payable in cash only. It is also stated that the company can issued fully paid bonus shares out of profit. But there are guidelines issued by SEBI for the issue of bonus shares, in which it is provided that bonus shares cannot be issued in lieu of dividend. Thus dividend is payable in cash only.
But the company should think about its liquid position before declaring dividend. The company should have enough bank balance to pay dividend. Sometimes, the company may have earned handsome profits but may not have enough cash. In that case, the company would borrow funds to pay dividend. However, this is not a desirable policy. The company may approach bank for temporary loan to pay dividend, if it expects to receive enough cash in near future. But it is not in the interest of business to borrow long-term funds for the purpose. In that case, it would be better to postpone the dividend or it may not be paid in cash. Cash planning is a pre-requisite for declaring dividend. It should also be noted that when a company pays cash dividend, its assets are diminished and also the net worth of the business.
Before declaring cash dividend, the company should consider:
(i) Whether it has enough current profits or enough accumulated past profits. It is advisable to pay dividend out of current revenue earnings only
(ii) Whether the liquid position of the company is satisfactory and would have enough cash on hand to carry on business smoothly even after payment of dividend
(iii) Types of shareholders. Most of the middle class shareholders expect dividend in cash while in closely held companies, most of the shareholders, are rich and would prefer capital gains or bonus shares than cash dividends.