Companies running in lucrative conditions release profit to their investors in three different ways. They could either pay the profit out to the shareholders or reinvest it in the business through expansion and the repurchase of shares. Some companies incorporate a little of both. Whenever a portion of the profit is paid out to shareholders, the payment is known as a dividend. In other words, dividends are payments made by a corporation to its shareholder members. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

There are three main types of dividends namely; cash dividends, property dividends and special one time dividends. Cash dividends are those paid out of a company’s profits to the owners of the business, which are the shareholders. A company that has preferred stock issued must make the dividend payment on those shares before a single penny can be paid out to the common stockholders.

The preferred stock dividend is usually set whereas the common stock dividend is determined at the sole discretion of the Board of Directors. A property dividend is one in which a company distributes property to shareholders instead of cash or stock. Property dividends could be in the form of railroad cars, cocoa beans, pencils, gold, silver, salad dressing or any other item with material worth. These dividends are recorded at market value on the declaration date. Last is the category of special one time dividends.

These are dividends that are paid by the company in addition to the regular dividends. Although given out under rare circumstances, these dividends could be a symbol of a major litigation win or the sale of a business or liquidation of an investment. These one time dividends can be in shape of cash, stock or property. At times, these special dividends are classified as a ‘return of capital’. In essence, these payments are not a payout of the company’s profits but instead a return of the money that the shareholders have invested in the business. As a result, returns of capital dividends are tax-free. In recent years, the temporarily lower rates of taxation on dividends have lead to an increase in special dividends.

All types of dividends are approved by a company’s management before payment. There are three important dates to be kept in mind regarding dividends. The declaration date signifies the day on which the Board of Directors intends to pay a dividend. This announcement means that the company now owes money to the stockholders. On the declaration date itself, the date of record and the payment date are also announced. The date of record is also known as ‘ex-dividend’ date. This date represents the day on which the stockholders of record are entitled to the upcoming dividend payment. Third important date is the payment date. This defines the day the dividend will actually be given to the shareholders of the company.

Dividends are ways for a company to share their wealth and recompense a stockholder for investing with them. In general, dividends are given out by stable, consistent and well known companies. Fast growing companies normally take the profits they have from dividends and instead reallocate the money within the company themselves until they reach a particular high in business. In the last century, dividends were the primary reason investors purchased stock. It was believed that the underlying principle of a company is to pay dividends. In the 21st century, the investor’s philosophy has changed. Today, the investor believes that the purpose of a company is to increase his or her wealth. And of course, beyond doubt dividends and capital gains are a source of financial boost for an investor.