Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 6

Dividends

A dividend is a portion of the company's net earnings returned to shareholders. The dividend is often in cash, less often in stock, but according to one source I checked, it could come in the form of property or scrip (which is a certificate for a fractional share of stock or a promise to pay the dividend sometime in the future).

Dividends are like breakfast cereals: They come in many varieties. Here are a few you may come across and many you will not.

• A cumulative dividend often refers to preferred stock that, if the company cannot make a dividend payment, must be paid in full before the common stockholders receive their dividend.
• An extra or special dividend is a nonrecurring dividend paid (often in cash or stock) in addition to the regular dividend. A company not paying regular dividends might wish to issue a one-time dividend after having a good year, for example. It is similar to winning the lottery and giving your relatives a piece of the action.
• An interim dividend is one paid ahead of the regular dividend.
• A company paying a liquidating dividend is one that is going out of business and is distributing its net assets on a pro rata basis to its rightful owners.
• A company gives the shareholder the option of choosing either cash or stock in an optional dividend payment, hence the clever name, optional dividend.
• A liability dividend is one paid with some type of debt, such as a bond, and it often means the company is short of cash.
• A phony dividend is an ...