What is Dividend? Why the company distribute Bonus Share or Cash Dividend?




Dividend

Dividend is certain portion of income of the company which is given for existing shareholders in the proportion of their holdings. The company may or may not provide dividend every year. It depends upon the decision of board of management & board of directors. Dividend distribution majorly depends up the capacity of organizations.  Dividend is provided in two forms; cash dividend & stock dividend (bonus share).

Firstly dividend is proposed by board of management. The decision is presented in regulatory body & Annual General Meeting (AGM) of respective company. After approval from both bodies dividend are distributed to shareholders.




Stock Dividend: It is also called as Bonus share. Bonus share is provided if company wants to capitalized its earning or hike its paid up capital. It is provided in proportion of units of share holding by shareholder. It is given from income of a company without any cost. It will increase the unit of shares but market price will be decrease due the price adjustment.

Example: Suppose a company to provide 10% bonus share, If a shareholder is holding 100 units of share than S/he will get 100 x 10% = 10 units share free of cost. Market price of stock will be decreased after bonus share due to price adjustment.

For dividend the company will announce book closure date to secured dividend. Those shareholders who get registered in book or buy a share one day before of book close will be eligible for getting dividend.

adjustment for bonus

Example: Suppose a company to give 50% bonus share if price before book close was Rs.500 than price after book close is calculated as follows;






Cash dividend: Cash dividend is provided to fulfill the cash need of shareholders or no need more capital for company. If stock dividend is provided shareholder have no cash to fulfill the needs unless shares are sold. Cash dividend may be better for big investor or long term investor.

Cash dividend is provided in par value of shares.

Suppose a company is providing 10% cash dividend to shareholder which have face value of Rs. 100 than s/he will be Rs. 10 cash dividend.

Price adjustment is applied in Cash Dividend also. If the cash dividend is more than the 10% of market price than price will be adjusted. Price Adjustment formula will be same as stock dividend.

Also Read: How Price Adjusted on Cash Dividend ?

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