In its most common form, a company may decide to pay dividends in the form of cash based on a schedule.
The frequency of payments for cash dividends varies across countries. For example, in US and Canada, the dividends are usually paid quarterly, in Europe, they are paid semi-annually, while in most Asian countries, it's paid annually.
Cash dividends can be in the form of regular dividends, special dividends, or liquidating dividends.
- Regular Dividends: These are the dividends that the companies’ pay based on a regular schedule (quarterly, semi-annually, or yearly). It is important for companies to maintain a stable record as it is seen as a sign of financial stability. An increase in regular dividends is also seen as a positive sign that directly impacts the share price.
- Special Dividends: Special dividends are paid either by companies that don’t pay regular dividends or by companies that pay regular dividends in addition to their regular dividends as a one-time dividend. Such dividends are usually paid in special circumstances such as when a company has huge excess cash or makes phenomenal earnings in a particular period. These are also called irregular or extra dividends. Companies in cyclical industries generally adopt this form of dividends. They will pay less regular dividends but will announce special dividends in good times.
- Liquidating Dividends: When a company goes out of business and liquidates all its assets, it distributes the proceeds from liquidation to the shareholders in the form of liquidating dividends. Even when a company sells a portion of its assets and distributes the proceeds to shareholders, it’s known as liquidating dividends.
Impact of Cash Dividends
The payment of cash dividends reduces company’s cash, and thus its assets. It also reduces the market value of the shares by the equivalent amount. Therefore, when a company pays cash dividends, the market value of its stock will drop. For example, if the current stock price is $20, and a dividend of $1 is paid, then the stock price immediately after dividend payment will be $19.
Impact on Financial Ratios
The decrease in cash and assets will have the following impact on financial ratios:
- Liquidity ratios will decrease
- Debt-to-asset ratio will increase
- Debt-to equity ratio will increase