Dividend is: Definition, Type, How it Works, and the Distribution Mechanism

If you invest a lot and read stocks, you may be familiar with the term dividend. Dividends are one of the advantages that stock investors can enjoy besides capital gains.

In fact, not only stock investors can enjoy dividends in the stock market, but also investors in equity crowdfunding. Because after the joint venture they will get shares of the business.

The nominal dividend received by investors varies depending on the number of shares owned. Some have reached IDR 1 trillion even though the shares are actually owned and the amount of dividends paid is also high.

In this article, we will discuss more about what dividends are and so on. Let's see this article to the end!

What Is a Dividend?

Dividends are part of the company's profits or income, the amount of which is decided by the directors and also approved by the general meeting, which is then distributed to all shareholders. Paying dividends to each owner is the main goal of the company.

Since distribution is the main goal, it requires shareholder approval via voting rights. Dividends are something that shareholders look forward to because the form of investment is like company equity and usually comes from net income. However, most of the profits remain with the company as retained earnings.

The profit will be used for the company's current and future business. The remaining profits can be distributed to shareholders as dividends.

Types of Dividends

There are 5 types of dividends that are known and are profits that are paid according to the approval at the general meeting. Here's the review:

1. Stock Dividends

If the number of shares owned by shareholders increases or increases, then the company will pay stock dividends. However, this doesn't change anything in terms of market capitalization, because the split is similar to a stock split. The method of payment is to increase the number of shares while decreasing the value of each share.

This division is the return on the company's investment. As a result, the share assets owned by the Company will increase due to the stock dividends paid.

2. Liquidation Dividend

Liquidation dividend means the return of capital from the company to the shareholders. If the company goes bankrupt, the company has the right to return shares to shareholders. The goal is that the company does not have debt or problems in the future.

3. Cash Dividend

Cash dividend means the distribution of profits from investment capital received in cash. Companies can pay cash dividends 2-4 times a year. Funds to pay cash dividends will be taken from the company's retained earnings, so profits will automatically remain and the company's cash reserves will decrease.

4. Property Dividends

As the name suggests, this property dividend is paid with assets or assets other than company cash. It can be in the form of a house whose value is in accordance with the dividend approved by the general meeting. This dividend was paid because the company experienced a decrease in its ability to pay cash dividends. This dividend is also rarely done because it is quite complicated and is not liked by shareholders.

5. Dividend Pledge of Debt

This method of paying dividends scripts or debt pledges is to get shareholders into a promissory note of a company. A statement of promised performance or payment of debt within a certain period of time. This dividend represents the arrival of new debt and must be recorded on the balance sheet. There is also interest, so the company is obliged to pay interest and debt to shareholders.

How Dividends Work

As previously mentioned, dividends are another advantage investors get from investing in stocks, along with capital gains. When capital gains are made by increasing the value of moving stock, it allows the investor to profit by selling those shares.

Although dividends are the distribution of profits that the company actually pays to its investors when the company is profitable. So, if you invest in the right stocks, you will reap huge dividends.

Sharing Mechanism

The distribution is divided into two mechanisms, interim dividends and final dividends.

• Interim dividend

The dividend distribution mechanism is given before the company's financial statements are closed or the time is still up.

• Final Dividend

Mechanism of dividend distribution after the company's bookkeeping process is complete.

Both mechanisms are used simultaneously within one year. Thus, investors will get 2x dividends in 1 year. In fact, not all companies use both methods. There are also companies that only use the definitive dividend mechanism. The final notional dividend to be received is also determined based on the results of the GMS where the interim dividend previously received has been deducted when the two methods of dividend payment are purchased or used.

Payment Procedure

The dividend payment procedure is also known as the dividend announcement date. Here are 5 dividend payment methods that you should know:

• Recording date

The date of record includes the name of the investor and shareholder information in the company authorized to pay dividends.

• Cum-dividend date

Last stock trading date for investors who wish to receive dividends in the form of cash dividends or stock dividends.

• Announcement date

The date on which the issuer or public company officially announces the form, amount and time of dividend payment.

• Payment date

The date on which the company pays dividends to shareholders who are entitled to dividends.

• Ex-dividend date

Release date of stock trading based on company receiving dividend right.

That was the discussion about dividends that you should know. Hopefully this article can add to your insight.