Dividend

The condition of being a shareholder usually goes hand in hand with the economic right to receive it. That is, the right to the dividend. Dividends represent the portion of the profits earned by the company that are destined to compensate shareholders.

This concept is part of a company’s liabilities, as it leaves its balance sheet in the form of profit distribution, encouraging shareholders to want to buy more shares in the company, and thus, enabling it to obtain financing.

The amount of the dividend must be approved at the General Shareholders’ Meeting, upon proposal by the Board of Directors. Within the dividend distribution policy, the fundamental question is the company’s ability to generate profits and the risk it incurs to obtain them.

Usually, when a company has many investment opportunities, the distribution of dividend decreases, since it has more sources of financing. However, it is also true that it is not advisable to surprise shareholders with changes in the amount of dividends.

It is very common to calculate dividends using net income and the payout, which is the percentage that is used to pay dividends and remunerate shareholders.

Dividend = Net profit * Payout

Let’s imagine a company has a net profit of 100 monetary units and has a payout of 25%. The company will pay a dividend of:

Dividend = 100 * 25% = 25 monetary units.

In general, there are the following types of dividends:

1. Interim dividend: It paid to the shareholder in his cash account as an advance payment of the profit obtained.
2. Final dividend: the dividend that is added to the interim dividend.
3. Extraordinary dividend: dividend that is paid when there have been extraordinary profits.
4. Stock dividend: It is distributed in the form of shares, instead of cash.
5. Fixed dividend: dividend that the company sets, regardless of the profit obtained.

In addition, we can distinguish between gross and net dividends, depending on whether the taxes that fall on profits are included or not.

The applications of it policies can be:

• Constant annual dividend.
• Fixed percentage on the profits of the fiscal year.
• Arbitrary policies at the convenience of the company. For example, there may be a minimum dividend to which shares or dividends are added.

Finally, it will be the company that establishes the criteria for the shareholder to be entitled to receive dividends, indicating until what date they must have the shares deposited and purchased in the portfolio. Generally, stock prices tend to fall the day after the company distributes dividends.

Let us assume the following data in dolars for this company:

• Profit to date (once the payout effect is discounted): 50,000
• Corporate income tax (assuming a rate of 25%): -12,500
• Allocation to reserves (let us assume 10%): -5,000
• Loss compensation: -10,000

Maximum interim dividend: 50,000 – (12,500 + 5,000 + 10,000) = 22,500 dolars

The 22,500 dolars will be the maximum interim dividend that can be paid.

According to the previous example, let us assume that the company decides to pay in advance 20,000 dolars of the maximum dividend it is going to pay and, at the end of the year, decides to complement its payment with the remaining 2,500 dolars, distributing the final payment among its shareholders.

The writer recommends:

• Payback
• Net present value (NPV)
• Internal rate of return (IRR)
• Compound interest