A dividend is the distribution of some of a company's earnings to a class of shareholders, as determined by the company's board of directors. Common shareholders of dividendpaying companies are typically eligible as long as they own the stock before the exdividend date.
Dividends may be paid out in cash or in the form of additional stocks. Larger, more established companies with more predictable profits are often the best dividend payers.
The company may choose different ways of paying out dividends. A company can also decide the frequency of paying out the dividend, meaning it can give it annually, monthly or quarterly.
1. Cash Dividend – most dividends are considered as cash dividends in the form of electronic transfer or check. Cash dividends can be beneficial for the investors because it will provide you with regular passive income on your investment on top of the possible appreciation of the investment. A Cash dividend seems a better choice if you want an automatic reward for placing your investments in certain companies.
2. Stock Dividend – stock dividends are issued by a company to its shareholders that is made in shares rather that as cash. For example, a company might issue a stock dividend of 5%, which will require it to issue 0.05 shares for each share owned by existing shareholders, so the owner of 100 shares would receive five additional shares.
This type of dividend may be made when a company wants to reward its investors but doesn't have the spare cash or wants to preserve its cash for other investments. The stock dividend, like any stock share, is not taxed until the investor sells it unless the company offers the option of taking the dividend as cash or in stock.
3. Liquidating Dividend – liquidating dividends are issued when the board of directors of a company decide to return the capital originally paid by stockholders as a dividend, this is usually a bad indicator because this dividend is often paid before the business shuts down.
4. Scrip Dividend – a company does not have sufficient funds to issue dividends in the near future, so instead it issues a scrip dividend, which is essentially a promissory note( which may or may not include interest) to pay shareholders at a later date.
"Please remember dividends are taxable income regardless of the form you received them"