Dividends and Dividend Payment Procedure

The portion of a company's profit distributed to its shareholders.

Dividend Payout Schemes

A dividend payout scheme (also called a dividend policy) is the decision of a company about how much of its earnings to distribute to shareholders as dividends and how much to retain for reinvestment. The main schemes are:

1. Stable Dividend Policy The company pays a fixed dividend per share every year, regardless of fluctuations in earnings. Shareholders receive a regular, predictable income. This suits companies with steady earnings and builds investor confidence. The dividend is maintained even in a lean year, and increased only when the higher earnings appear permanent.

2. Constant Payout Ratio Policy Here a fixed percentage of earnings is paid out as dividend each year (e.g., 40% of net profit). Since earnings vary, the dividend amount also varies from year to year. This policy is simple to follow but gives shareholders an uncertain income.

3. Regular plus Extra Dividend Policy The company pays a low, regular dividend every year and declares an extra dividend in years of exceptionally high profit. This gives stability plus a share in prosperity, without committing the company to a permanently higher dividend.

4. Residual Dividend Policy Dividend is paid only from what is left over after financing all profitable investment projects from retained earnings. Under this scheme, the company first uses earnings for investment, and distributes the residual (if any) as dividend. It is common in growing firms that need funds for expansion.

5. Zero Dividend (Plough-back) Policy The company pays no dividend and retains all earnings for growth and expansion. Investors gain through capital appreciation rather than current income. This suits fast-growing companies.

Factors affecting the choice: legal restrictions, liquidity position, stability of earnings, growth opportunities, tax position of shareholders, and the desire to maintain control of the company.

Factors affecting dividend decision (any five):

1. Earnings of the company Dividend is paid out of profits. A company with high and stable earnings can afford to declare a higher dividend, while a company with low or fluctuating earnings must retain more and pay less. Earnings are, therefore, the most basic factor.

2. Stability of earnings A company whose earnings are stable and predictable can commit to a regular dividend policy. A company with unstable earnings prefers a low, conservative dividend so that it does not have to reduce the dividend in a bad year, since a cut in dividend adversely affects the market price of shares.

3. Growth opportunities A growing company needs large funds for expansion, modernisation and diversification. It is cheaper and easier to finance such needs through retained earnings than through fresh issue of shares. Hence, growing firms retain a larger part of profits and pay a lower dividend. Mature firms with few investment opportunities pay a higher dividend.

4. Cash flow position and liquidity Dividend is paid in cash. Even a profitable company may not have sufficient cash or bank balance to pay dividend, because profits may be locked up in debtors and inventory. Such a company declares a lower dividend to avoid a liquidity crunch. Liquidity and cash flow thus directly influence the dividend decision.

5. Preference of shareholders Shareholders' expectations differ. Those who depend on dividend for regular income (retired persons, small investors) prefer a high dividend payout. Shareholders in a high tax bracket may prefer capital gains, since capital gains are taxed at a lower rate than dividend income. The company's dividend policy must, therefore, keep the preferences of its shareholders in view.

Other factors (may be mentioned): stability of dividend, legal constraints, contractual constraints, access to the capital market, tax policy of the government, stock market reaction, and the age of the company.

A stock dividend is a dividend paid in the form of additional shares of the company instead of cash. It is issued when a company wants to reward shareholders without using cash, by capitalising its retained earnings or reserves and distributing bonus shares in proportion to existing holdings.

Dividend payment schemes are the forms in which a company pays out profit to its shareholders. The main ones are as follows.

1. Cash dividend Paid in cash (usually by cheque or bank transfer). It is the most common form and gives shareholders immediate income. It reduces the company's cash and retained earnings.

2. Stock dividend (bonus shares) Paid as additional shares instead of cash, by capitalising retained earnings. It conserves cash, increases the number of shares and does not change total shareholders' equity. Companies in Nepal commonly distribute bonus shares.

3. Bond dividend Paid in the form of the company's bonds or debentures when cash is short but profit is available. The bonds carry interest and are repaid at maturity.

4. Property dividend Paid in assets other than cash, such as securities or products of the company. It is rare.

5. Scrip dividend Paid by issuing a promissory note (scrip) promising payment at a later date when funds are available.

6. Cash option dividend Shareholders may choose to receive either cash or additional shares.

Stock split (splitting a share into several shares of lower face value) is sometimes mentioned with these, but it is not strictly a dividend because no profit is distributed.

Dividend is the portion of a company's profit that is distributed among its shareholders as a return on their investment.

Dividend is the portion of profit distributed to shareholders. Before it reaches the shareholders, a company must follow a set of legal and procedural steps. The general procedures followed while distributing dividend are as follows:

1. Ascertainment of distributable profit The board first determines the amount available for distribution. Dividend can be paid only out of the current year's profit or accumulated reserves (free reserves) after providing for depreciation, taxation, and transfer to statutory reserves. Profits of a capital nature cannot be used for paying dividend.

2. Recommendation by the Board of Directors The board of directors, in a board meeting, recommends the rate and amount of dividend (interim or final) considering the company's earnings, liquidity position, legal restrictions, and future plans. The recommendation is made as a resolution of the board.

3. Approval by the shareholders in the general meeting The recommended dividend must be approved by the shareholders in the annual general meeting (AGM). The shareholders have the right to reduce the rate recommended by the board but cannot increase it. Once approved, the dividend becomes a legal liability of the company. In the case of interim dividend, however, the board itself can declare it without shareholder approval.

4. Arrangement of funds After approval, the company must arrange sufficient cash to pay the dividend. It must ensure that the payment does not impair its working capital or its ability to meet other obligations.

5. Record date and closure of register of members The company fixes a "record date" or closes its register of members for a certain period. Only those persons whose names appear in the register on that date (or who hold valid share certificates) are entitled to receive the dividend. This determines the eligible shareholders.

6. Deduction of tax at source Before payment, the company deducts tax on dividend at the prescribed rate as required by the income tax law and deposits it with the government. Shareholders receive the net amount after such deduction.

7. Payment of dividend The dividend is then paid to the shareholders within the period prescribed by law (generally within 30 days from the date of declaration) through cheques, bank transfer, or electronic means. Payment may be made in cash or, if authorised by the articles, in kind.

8. Transfer to unpaid dividend account Any amount of dividend that remains unclaimed or unpaid within the prescribed period is transferred to a separate "Unpaid Dividend Account" of the company. Amounts remaining unclaimed for a longer period (as specified by law) are transferred to the government's Investor Protection Fund.

9. Maintenance of records The company maintains a register of dividend payments, showing the names of shareholders, the amount paid, tax deducted, and the date of payment. This record is kept for audit and legal purposes.

In short, dividend distribution moves from profit ascertainment → board recommendation → shareholder approval → fund arrangement → record date → tax deduction → payment → handling of unclaimed amounts, all within the legal framework of the Companies Act.