What is Dividend?
A dividend is a portion of a company's profits paid to its shareholders as a return on their investment.
Is it compulsory to pay dividend?
No, it is not compulsory for a company to pay dividends. Dividend payments are typically a discretionary decision made by the company’s board of directors, based on factors like:
Profitability: If a company isn’t making profits, it’s unlikely to pay dividends.
Growth Strategy: Companies in growth phases often reinvest earnings to expand, rather than paying dividends.
Cash Flow Needs: If a company needs funds for operational or expansion purposes, it may forgo dividends to maintain a strong cash position.
Market Conditions: During economic downturns or uncertainty, companies may conserve cash rather than distribute it.
However, if a company's constitution explicitly states that dividends must be paid, then, yes, it becomes a binding obligation for the company to distribute dividends according to those terms.
Having said that, there are still practical and legal limitations:
Availability of Profits: Dividends can only legally be paid from profits or retained earnings. If the company does not have sufficient profits, it generally cannot legally pay dividends, even if required by its constitution.
Directors' Duties and Solvency: Directors have a legal duty to ensure the company remains solvent. If paying a dividend would threaten the company's financial health, they may be compelled by law to prioritize solvency over any stated dividend requirement.
What are types of dividends?
Dividends can be categorized into several types based on their form, timing, and method of distribution. Here are the main types of dividends:
Cash Dividends
Definition: The most common type, cash dividends are paid out in cash to shareholders.
Payment Method: Typically distributed through electronic transfers or checks.
Example: A company declares a cash dividend of $1 per share; a shareholder with 100 shares would receive $100.
Stock Dividends
Definition: Instead of cash, shareholders receive additional shares of the company’s stock.
Impact: This increases the total number of shares outstanding but does not affect the overall value of the company.
Example: A company may declare a 10% stock dividend, meaning a shareholder with 100 shares would receive an additional 10 shares.
Special Dividends
Definition: One-time dividends that are typically larger than regular dividends, declared after particularly profitable periods or when a company has excess cash.
Purpose: Used to reward shareholders outside of the normal dividend schedule.
Example: A company might issue a special dividend of $2 per share after a successful merger.
Preferred Dividends
Definition: Dividends paid to preferred shareholders, who have a higher claim on assets and earnings than common shareholders.
Characteristics: These dividends are typically fixed and may be cumulative, meaning if a company misses a dividend payment, it must pay the missed amount to preferred shareholders before any dividends can be paid to common shareholders.
Example: A preferred stock might pay a dividend of 5% of its par value.
Property Dividends
Definition: Dividends paid in the form of assets other than cash, such as products, real estate, or other investments.
Usage: Less common, often used by companies looking to distribute assets to shareholders.
Example: A company may distribute some of its inventory to shareholders as a property dividend.
Scrip Dividends
Definition: A form of dividend where a company issues promissory notes to pay dividends at a later date.
Characteristics: This allows companies to conserve cash by offering a promise to pay a cash dividend in the future.
Example: A company might offer a scrip dividend instead of an immediate cash payout, allowing shareholders to choose between cash or additional shares.
Liquidating Dividends
Definition: Paid when a company is in the process of liquidation, distributing its remaining assets to shareholders.
Characteristics: This is not considered a regular dividend; instead, it represents a return of capital to shareholders as the company winds down operations.
Example: A company sells off its assets and pays shareholders a dividend from the proceeds.
Is dividend taxable in Singapore?
In Singapore, dividends are generally not subject to tax at the level of the shareholder due to the one-tier corporate tax system.
Under this system, corporate profits are taxed at the corporate level, and dividends paid to shareholders are exempt from further taxation. This means that when a company pays dividends, shareholders do not need to pay income tax on those dividends.
You are not required to pay tax if:
The dividend comes from Singapore resident companies under the one-tier corporate tax system, excluding co-operatives.
You receive foreign dividends in Singapore as a resident individual, except those received through a partnership in Singapore.
You obtain income distributions from Real Estate Investment Trusts (REITs), except for those received by individuals through a partnership in Singapore or linked to conducting a trade, business, or profession involving REITs.
You are required to pay tax if:
The dividend originates from co-operatives.
You receive foreign-sourced dividends through a partnership in Singapore.
You obtain income distributions from Real Estate Investment Trusts (REITs) via a partnership in Singapore.
When dividends can be paid?
A company can pay dividends under certain conditions, typically governed by both legal requirements and financial considerations. Here’s when dividends can be paid:
Sufficient Profits or Retained Earnings: Dividends can only be paid if the company has sufficient profits, either from the current period or from accumulated retained earnings. Paying dividends without adequate profits is generally prohibited by law.
Solvency and Liquidity Requirements: A company must remain solvent after paying dividends. This means it should be able to meet its debts and liabilities. If a dividend payment risks the company’s financial health, the board might choose to withhold dividends.
Board Approval: Dividends must be declared by the company’s board of directors. Even if the company is profitable, the board must formally approve the dividend to ensure it aligns with the company’s financial strategy.
How many times dividend can be paid in a year?
In Singapore, there is no strict limit on the number of times a company can pay dividends in a year. A company may choose to pay dividends:
Quarterly: Four times a year, often used by larger or more established companies with consistent cash flows.
Semi-Annually: Twice a year, typically with interim and final dividends.
Annually: Once a year, common among companies that prefer to assess profits after the financial year closes.
Special Dividends: Additional one-time dividends can be paid any time during the year if the company has surplus profits.
What is the limit of dividends can be paid?
While there isn't a fixed upper limit on dividends, practical constraints include profitability, solvency, adherence to company policies, ensuring that dividends are paid sustainably and responsibly.
How is dividend calculated?
Per Share Basis: The most common method of calculating dividends is on a per-share basis. The formula is:
How do you declare dividend in Singapore?
Board Approval
The process starts with the company’s board of directors reviewing financial statements to assess profitability, cash flow, and future cash needs. The board evaluates if paying a dividend aligns with the company’s financial strategy and if sufficient funds are available without affecting solvency.
Formal Declaration
Once approved, the board declares the dividend at a formal board meeting and documents the decision in the minutes. The declaration should include:
Dividend per Share: Amount to be paid per share.
Ex-Dividend Date: The cutoff date by which shareholders must own the shares to qualify for the dividend.
Record Date: The date on which the company confirms eligible shareholders.
Payment Date: The date the dividend will be paid to shareholders.
Distribution of Dividend
On the payment date, the dividend amount is transferred to eligible shareholders. This is typically done through direct bank transfers or cheques, depending on shareholder preferences and company procedures.
What are the Consequences of Paying Dividends When No Profits Are Available?
Paying dividends without sufficient profits (or retained earnings) can lead to serious consequences for both the company and its directors. Here’s what could happen:
Violation of the Law
In many jurisdictions, including Singapore, dividends can only be legally paid out of profits. When a company pays dividends when there are no profits or retained earnings, it violates the Singapore Companies Act considered an unauthorized distribution and can lead to penalties or legal repercussions.
Director Liability
Directors could be held personally liable for the improper distribution, especially if they acted recklessly or with disregard for the company’s solvency requirements.
Requirement to Repay Dividends
If the company becomes insolvent due to an unauthorized dividend payment, the recipients of the dividends (shareholders) may be required to repay the dividends to restore the company’s financial position.
Damage to Company’s Financial Health and Reputation
Paying dividends when there are no profits can weaken the company’s cash reserves, reducing its ability to meet financial obligations, invest in growth, or weather economic downturns. It can also damage the company’s reputation, particularly with creditors, investors, and regulators, potentially impacting its ability to raise capital or secure favourable terms on loans in the future.
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