Question

Answer the following question.

Define Dividend and explain its features.

Answer 1

Meaning:

1. Term ‘Dividend’ is derived from the Latin word ‘Dividendum’ which means ‘that which is to be divided’.
2. It is a part of the profits of the company that is distributed among the shareholders of the company.
3. A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
4. Usually, the term ‘Dividend’ refers to the Annual/final Dividend unless it is specifically mentioned as an Interim Dividend.

Definition:

1. The Institute of Chartered Accountants of India (ICAI) has defined Dividend as, “a distribution to shareholders out of profits or reserves available for this purpose.”
2. The Supreme Court has defined it as, “In case of going concern, it means portion of profits of a company, which is allotted to the holders of shares in a company.”

Features:

1. It is the portion of the profits of the company paid to its shareholders.
2. It is payable out of the profits of the company.
3. A dividend is an unconditional payment made by the company.
4. The company can pay dividends only to the shareholders viz. Equity and Preference.
5. If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
6. The dividend cannot be declared out of capital.
7. The dividend can be declared only on the recommendation of the Board of Directors.
8. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
9. Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
10. Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
11. The dividend includes Interim Dividend.
12. The dividend must be paid in cash and not in kind.
13. The dividend is to be paid on the paid-up value of shares.
14. The dividend cannot be paid on calls paid in advance.