Dividend

Eduzendium article

Dividends are payments by a corporation to shareholders that are given to shareholders and represent a return on the capital directly or indirectly contributed to the corporation by the shareholders.

Dividends come in several different forms. The basic types are as follows:

1. Regular Cash Dividends
2. Extra Dividends
3. Special Dividends
4. Liquidating Dividends

Some important characteristics of dividends include the following:

• The payment of dividends is at the discretion of the board of directors. If dividends are declared it is not a liability of the corporation. A corporation cannot default on an undeclared dividend. As a consequence, corporations cannot become bankrupt because of nonpayment of dividends. The amount of dividend and even whether it is paid are decisions made by the board of directors.

• The payment of dividends by the corporation is not a business expense. Dividends are not deductible for corporate tax purposes. In short dividends are paid out of the corporations aftertax profits.

• Dividends received by individual shareholders are taxable. However, corporations that own stock in other corporations are permitted to exclude 70 percent of the dividend amounts they receive and are taxed only the remaining 30 percent. The 70/30 rule only applies when the recipient owns less than 20 percent of the outstanding stock in the corporation.