Updated July 19, 2023
Definition of Dividend Declared
The dividend is the portion of the company’s profit, which is paid as a return on the investment to the shareholders. In contrast, the dividend declared refers to that portion of the profit that has been approved by the board of directors in a board meeting and confirmed by the shareholders in a general meeting as a dividend to be paid, and until paid dividend declared is treated as current liabilities.
Explanation
The dividend is the return on the investment in shares paid only if sufficient profits are available. The dividend on equity shares fluctuates; it changes with the change in the profit, higher the profit chances of a high dividend declaration. In the case of preference shares, the dividend is fixed and paid before payment to the equity shareholders, whereas in the case of mutual funds, the dividends as not to be declared on an annual basis; it is sometimes declared every quarter also; mutual fund company invest in different stocks and manage the portfolio to earn the maximum returns to the shareholders. In the case of mutual funds, dividends differ depending upon the plan of the mutual fund. In all cases, the dividend declaration follows a specific process. The organization’s board of directors can decide whether to recommend the dividend. If they recommend it, the shareholders must approve the dividend declaration in a general meeting. Once the shareholders approve, the dividend is declared, and a liability for the dividend payment is created in the balance sheet.
Example of Dividend Declared
An Inc. deals in consumer durables, and in 2019-2020, it earned a profit of $ 250,000 after deducting all expenses and paying all taxes. The organization has 1,000 5% preference shares having a face value of $ 100 each. Also, the organization has 5,000 equity shares having a face value of $ 100 for each share. The Board of Directors of A Inc declared the dividend @ 10% on equity shares. Determine the procedure involved in declaring the dividend and the amount of dividend to be paid from profit to equity and preference shares.
Solution:
For the Declaration of Dividends on equity shares, the following is the procedure;
The Board of Directors is to recommend the rate of dividend to be paid. That recommendation of dividend declaration is to be put before the shareholders in a general meeting, and that is to be approved by the ordinary resolution in a general meeting i.e. a minimum of 50% of the value of shares, the shareholders present in the meeting must have agreed to it. The shareholders cannot increase the rate of dividends. Once the dividend is approved by ordinary resolution, the dividend is said to be declared. It becomes the organization’s liability and must pay within a few days of the declaration per the country’s norms. Before payment to dividends on equity shareholders, the first payment of dividends to preference shareholders is to be made.
In the given case of A Inc.
The dividend on Preference shares is to be paid before the payment to equity shares.
Dividend on Preference Shares is calculated as
- Dividend on Preference Shares = $ 100,000 * 5%
- Dividend on Preference Shares = $ 5,000
Dividend on Equity Shares is calculated as
- Dividend on Equity Shares = $500,000 * 10%
- Dividend on Equity Shares = $50,000
Amount to be recognized as liability as declared dividend = $ 55,000 ($5.000 + $55,000)
The Balance Profit i.e. $ 195,000 ($ 250,000 – $ 55,000) is to be transferred to the balance sheet as retained earnings.
List of Dividends Declared by Mutual Funds
List of daily Dividend declared by Mutual funds recently and their rate of dividend is as follows:
|
Name of Mutual Fund Company |
Rate of Declaration of Dividend (%) |
| ICICI Prudential FMP S 81 | 0.50 |
| Tata Liquid funds | 0.02 |
| L & T Liquid funds – daily dividend re-investment plan | 0.01 |
| Aditya Birla Sunlife liquid fund – retail plan | 0.03 |
| Axis triple advantage fund | 1.20 |
| UTI ultra-short fund | 1.20 |
| Axis shirt term fund retail plan | 0.37 |
| UTI arbitrage fund | 0.80 |
| Kotak liquid fund -Plan A – Direct plan | 0.10 |
Advantages of Dividend Declared
Advantages are provided and discussed below:
- A dividend declaration satisfies the investors that they have invested in the right organization, where they get the proper return on the investments made. This attracts more investors.
- Declaration of dividends increases the market value of the shares and increases the reputation in the market because of satisfied investors.
- The company will be beneficial in case of further public issues for expansion or diversification.
- Once declared, it becomes the organization’s liability and is to be paid within a few days of declaration.
- The dividend declaration enhances the wealth of shareholders.
Disadvantages of Dividend Declared
Disadvantages are provided and discussed below-
- In some countries, the dividend is tax-free, and the organization declaring the dividend has to pay taxes on it from its own pocket; this demotivates the organization to declare dividends.
- The procedure and legal formalities in declaring and paying dividends are lengthy and time-consuming.
- Declaration of dividends sometimes results in a loss of opportunity for investment where the organization can get the maximum returns.
- Not all investors get satisfied with the rate of declaration.
- On declaration, as it affects the market price, the volatility in the stock market increases.
Important Points About Dividend Declared
- It is upon the board of directors to decide whether to recommend the dividend or not to recommend the dividend. They can decide not to declare dividends even if sufficient and huge profits are available.
- Before declaring the dividend, adjustments are made for unabsorbed depreciation and brought forward losses.
- After the dividend declaration, the organization must transfer the dividend amount to a separate bank account to pay the shareholders.
- The dividend payment is to be reduced from the retained earning account.
Conclusion
The shareholders in the organization receive the dividend as a return on their investment, and the declaration of a dividend depends on the availability of sufficient profits within the company. Before declaring the dividend, adjustments need to be made for any brought forward losses and unabsorbed depreciation. The board of directors holds the authority to determine whether or not to recommend the dividend. The shareholders cannot question the board for the non-declaration of dividends. Once declared, a dividend becomes the organization’s liability and must be paid.
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