If you are a shareholder, you must be familiar with the term 'cash dividend'. For some people, cash dividends are just additional money distributed by the company. In reality, dividends are one of the ways a company demonstrates its performance while giving rewards to its shareholders.
Cash dividends can be a source of passive income, an indicator of company health, and a quite attractive investment strategy. This makes many beginner and experienced investors always pay special attention to this type of profit distribution.
In this article, we will discuss what dividends are, cash dividends, understanding the various types of existing dividends, and reviewing examples in practice.
Key Takeaways:- For some people, cash dividends are just additional money distributed by the company. In reality, dividends are one of the ways a company demonstrates its performance while giving rewards to its shareholders.
- Quoting from Caroline Banton, a writer in the field of business and finance whose articles appear in various publications including Investopedia, dividends are basically part of a company's profits given to shareholders.
- Meanwhile, cash dividends are a form of profit distribution directly given in the form of money to shareholders.
- There are several other forms of dividends applied by companies according to their financial conditions and strategies.
What is Meant by Cash Dividend?
Quoting from Caroline Banton, a writer in the field of business and finance whose articles appear in various publications including Investopedia, dividends are basically part of a company's profits given to shareholders. When a company successfully accumulates retained earnings, management has several options, including using those profits for business expansion, paying off obligations, or saving them as reserves for the future. However, management can also decide to distribute part of those profits to investors. This profit distribution process is called a dividend (Caroline Banton, 2022).
Meanwhile, cash dividends are a form of profit distribution directly given in the form of money to shareholders. Generally, the funds distributed come from profits earned by the company currently or from profits that have been accumulated previously. Unlike stock dividends or other forms, cash dividends are paid directly in the form of money, and usually investors have the option to receive them as fresh funds or reinvest them through facilities provided by brokers.
Cash dividends are the most common type of dividend distribution by companies, because they are also beneficial for shareholders, where they can obtain profits in the form of cash. Cash dividend distribution is usually done in periods of two to four times per year. In addition, this dividend distribution will also be subject to tax according to applicable regulations.
Types of Dividends Besides Cash Dividends
After understanding that dividends are basically the distribution of company profits to shareholders, it turns out the form of distribution is not always in the form of cash. There are several other forms of dividends applied by companies according to their financial conditions and strategies.
Here are the types of dividends other than cash dividends, quoted from Hendrik, a writer from Gramedia.com (Hendrik, n.d.):
1. Stock Dividends
Besides cash, companies can also distribute dividends in the form of new shares. This means shareholders will receive additional shares according to their ownership portion. This method is usually done to keep the company's cash flow safe, while strengthening capital without having to issue cash. With the increase in the number of shares, investors have the potential to get long-term profits when stock prices rise.
2. Property Dividends
Another type of dividend that is rarer is property dividends, which is the distribution of profits in the form of non-cash assets, such as goods or company inventory. This mechanism generally appears when the company does not have sufficient cash liquidity because its funds are being used for other needs, such as investment or operations. Although quite unique, this type of dividend distribution is quite complex and not as frequent as cash or stock dividends.
3. Liquidation Dividends
There are also dividends that appear when the company is in the phase of business termination or dissolution, namely liquidation dividends. In this condition, shareholders can receive a portion of the company's remaining assets, which can be in the form of profits or return of capital. However, if the company really has no remaining wealth, then shareholders will not receive any distribution.
4. Scrip Dividends (Promissory Note Dividends)
In some situations, companies choose to distribute dividends not in the form of cash or assets, but in the form of promissory notes. This document becomes an official statement that the company will pay dividends at a predetermined time in the future. This scheme is usually chosen when the company's cash condition is limited, so payment is postponed with an official guarantee in the form of the promissory note.
Example of Cash Dividends
An example of cash dividend distribution in Indonesia can be seen from the corporate action of PT Unilever Indonesia Tbk (UNVR), as reported by IndoPremier, a securities company in Indonesia that provides financial services, especially in the capital market sector. In the 2022 fiscal year, this company set a final dividend of Rp71 per share which was approved at the Annual General Meeting of Shareholders (RUPST) on June 22, 2023. Previously, UNVR had also distributed interim dividends worth Rp 69 per share in December 2022.
Thus, the total dividends distributed throughout 2022 reached Rp 140 per share or around Rp2.63 trillion. This decision was still taken even though the company's net profit decreased 6.83% to Rp5.36 trillion, compared to the previous period of Rp5.75 trillion. However, on the other hand, net sales actually increased 4.23% to Rp41.21 trillion. This step shows how a company with a strong business base remains committed to providing returns to shareholders, even when facing profitability challenges (IndoPremier, 2023).
How Does the Cash Dividend Distribution Mechanism Work?
The cash dividend payment mechanism usually follows a structured flow so that the distribution process runs fairly and efficiently for shareholders. In general, there are several important stages you need to understand to know when dividends will be received and how this can affect your investment strategy.
1. Declaration Date
The cash dividend distribution process begins when the board of directors holds an Annual General Meeting of Shareholders (RUPS) to announce the official decision regarding dividend distribution. At this stage, the company announces the amount of dividend per share, while setting the record date and payment date. This information provides clarity to investors regarding the amount and schedule of dividend receipt.
2. Record Date
On the record date, the company determines who the shareholders are entitled to dividends. Only those recorded as share owners up to this date will be included in the recipient list. This way, the company has an official record of shareholders entitled to receive payment.
3. Ex-Dividend Date
The ex-dividend date is usually set one business day before the record date. Investors who buy shares before this date are still entitled to receive dividends. Conversely, if the purchase is made on or after the ex-dividend date, dividend rights will remain with the share seller.
4. Payment Date
The final stage is the payment date, which is the day when the company actually distributes cash dividends to entitled shareholders. Generally, payment is made through direct transfer to the investor's broker account or by other methods according to company policy.
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Those are various pieces of information we can provide about cash dividends. Understanding the dividend distribution schedule, dividend amount, and company policies regarding dividend distribution is very important to be able to develop a more mature investment strategy. With proper planning, cash dividends not only become additional income, but also support the achievement of long-term financial goals.
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