What Is a Cash Dividend?
A cash dividend is a distribution of the company's profit to shareholders in the form of cash. Dividends are paid out of profit earned, not out of capital. A dividend is not an expense but a distribution of profit deducted from retained earnings.
Interim and Final Dividends
An interim dividend is paid by the directors during the financial year, based on interim profit. A final dividend is proposed at year-end and approved by shareholders at the Annual General Meeting (AGM). The total dividend for the year is the interim dividend plus the final dividend.
Key idea
Preference dividend = fixed rate × paid-up preference share capital.
Ordinary dividend = declared rate × paid-up ordinary share capital (or sen per share × number of shares).
Calculation
Example
Cempaka Bhd. has 100,000 6% preference shares @ RM1 and 400,000 ordinary shares @ RM1. For the year, it declares an ordinary dividend of 5%.
- Preference dividend = 6% × RM100,000 = RM6,000
- Ordinary dividend = 5% × RM400,000 = RM20,000
- Total dividend = 6,000 + 20,000 = RM26,000
When the dividend is paid, the entry is Dr Dividend RM26,000; Cr Bank RM26,000. The dividend account balance is then deducted from retained earnings.
Proposed Dividends and Dividend Policy
A final dividend that has been proposed but not yet paid at year-end is a proposed dividend. Because the company owes it to shareholders, it is shown as a current liability in the Statement of Financial Position until it is paid. Directors must balance two aims: rewarding shareholders now with cash dividends, and keeping profit in the business as retained earnings to fund future growth. Paying too much leaves little for expansion, while paying too little may disappoint shareholders. A company can only pay a dividend out of available profit, never out of capital, so that the capital contributed by shareholders is kept intact.
Remember
A preference dividend is always calculated at the fixed rate on the paid-up preference share capital only, regardless of the year's profit (as long as there is profit to pay it).