Editorial

The Different Types Of Dividends That You Can Invest In

There are lots of different ways to invest in modern business. You can buy shares, become a partner and even buy out a failing company. One of the more popular ways to invest; however, is by participating in dividend stocks.

A dividend is a payment that is made to all of the shareholders in a business as return on their initial investment. It doesn’t require any participation from the investors, and can act as a nice way to earn a bit of extra passive income. This payment will often increase when the business succeeds at a rate that you decide upon with the owner when you make your investment.

There isn’t just one type of dividend out there, though. So how are you supposed to know what the best one to invest in is? This article will look at all the different types of dividend and weigh up the pros and cons of each one so that you are more informed about your next investment. Some of these are a great choice, while others are doled out as necessity dictates. Without further ado, let’s look at some of these types of dividends.

A Cash Dividend

The most common form of dividend is the cash dividend. This type of dividend is very straightforward. All it requires is a monetary investment from the buyer and they will then receive their dividend back in cash that is transferred straight into their bank account.

This method is quick and simple, allowing for all investors to wait and receive their payments once the business starts earning a profit. Of course, the dividend money is taxed in Canada at the usual rate.

The cash flow of a business is a good sign of its overall health. If the company has the money to pay the shareholders significant amount, then you are likely to be in good stead with your investments. However, you may also want to look at another type of dividend.

A Stock Dividend

A stock dividend works in the same way as a cash dividend. The only difference here is that the shareholders receive shares in the company as part of their investment, rather than actual cash.

The reason that a company may choose to reward their shareholders with a stock dividend rather than cash is because it does not reduce the amount of money that the business holds. However, if the business has more money, it is more likely to succeed. Therefore, there will be more profitable shares available in the future. This type of dividend allows the investor to receive something back for their investment, and also lets the company innovate and improve with the money they have earned.

In terms of tax, some governments may view the stock dividend as property rather than a private asset, which means that a stock dividend will be taxed at a higher rate. If you are unsure as to how some stock investments work, check out Wealth Simple to learn more about Canadian dividend stocks.

If not, keep going to learn more about how else you could receive a dividend.

A Scrip Dividend

A scrip dividend is only slightly different from a stock dividend, but still counts as a separate entity. The shareholders still receive a payment in the form of stock with a scrip dividend, only the payment is more likely to consist of more recent shares in the company.

The scrip dividend holds all of the benefits of a stock dividend, only it is not paid out immediately. If a company finds that it is unable to pay their shareholders the full amount of their impending dividend, they can choose to offer scrip instead. This scrip is a form of credit, something that is owed to the investor when the business can eventually pay them.

That is why scrip dividends are more likely to pay out in the form of newer or future stock. This stock is more valuable as a result and gives the investors the opportunity to get hold of it before anyone else. What’s more, scrip is taxed less than other forms of dividend. Try to think of scrip as more of an IOU and you are along the right track.

A Property Dividend

A property dividend can also be offered to investors instead of the traditional cash or stock method. The company that pays out this type of dividend must work out the value of the shareholders dividend in cash or stock, and then offer them some property or assets that shares this same value.

This is not a common type of dividend, but property dividends are often used in times where the business cannot afford to let the company’s shares become diluted, or lose any finances as a result of poor performance. The shareholders are still given something in lieu of their investment, and the business is given further opportunity to dog themselves out of any trouble.

However, some shareholders will choose to take property as a dividend in circumstances where they will be taxed less on these assets than when receiving cash. This property can also be traded on, sold or used as collateral for business loans.

A Liquidation Dividend

Unfortunately, most shareholders do not want to receive a liquidation dividend. However, some situations call for these to be distributed.

This type of dividend is dished out to the shareholders once the company has declared that it can no longer continue to function. These dividends are often paid out in regular instalments in any form that the company can afford. Either way, a liquidation dividend is the last payment owed to the shareholders before the business is liquidated.

This payment must still be made up for long after the company dissolves, and very little tax is paid on these types of assets. That is mostly due to the fact that these dividend instalments are often paid off in tiny amounts.

On a more positive note, the company going into liquidation isn’t the only reason that these types of dividends are offered out. A company that is sold with the promise of giving the new buyer a choice of shareholders will still have to pay out a liquidation dividend to their former investors. These can be paid out in one sum as normal, or in instalments made by the owner. This decision is to be agreed on when the purchase is made and neglecting former investors is illegal.

What Is The Best Type Of Dividend

Now that you understand all of the different types of dividend, let’s work out which one is best. Of course, this decision is entirely circumstantial.

First of all, let’s all agree that a liquidation dividend is not even in contention for the best kind of dividend. Those who receive this type of offer are usually doing so in extreme circumstances. This means that the business venture has come to an end and you are only receiving this payment as a last resort.

A property dividend isn’t the worst choice, but it is very circumstantial. In some countries you may encounter less tax for receiving property as a dividend. However in Canada, property is normally taxed at a higher rate. This means that property dividends are not that common in this part of the world. Property dividends are only really dished out in times of liquidation, or if the company wants to hold on to its stock for as long as possible. Therefore, property dividends are more in line with liquidation dividends in Canada.

Cash dividends are a nice, basic way to receive a return on your investment. There is no fuss about this type of payment, and it usually comes as a sign that the business is doing well. You can choose to do whatever you want with this type of dividend. Use it as savings or invest further, the choice is yours. However, there aren’t many opportunities for your investment to grow with a cash dividend. For those types of opportunity, you have to look at stocks.

The number one rule of owning stock is that you should buy low and sell high. That is exactly what a stock dividend allows you to do. A shareholder that buys into a new business will do so when the stock is cheap. Then when the business improves they will receive shares that are at a higher price. The best way to approach a stock dividend is to receive a high level of stock and then sell it on. Then, you can use the money to earn a tidy profit and get involved in another small business to repeat the process.

Stock dividends are a good option for investors that want to make money and improve their portfolio.

Summary

Now that you understand the different type’s dividends, you can make an informed decision about how best to invest in other companies. Also, you can clearly see how a stock dividend is one of the best ways to invest in a business in Canada.

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