In the business world, dividend distribution is something that shareholders look forward to. Where dividends are a distribution of the company’s net profit or profit to shareholders based on the number of shares owned.
In other words, dividends are a form of return given to investors for investments made to the company. This reflects the company’s positive performance and helps maintain investor confidence. So what are the types of dividends? And what is the dividend distribution mechanism? Let’s look at the explanation below.
What is a Dividend?
As explained, dividends are part of the profit or income of a company, which will be distributed to all shareholders. The amount of dividend distribution has been determined by the board of directors and also authorized at the General Meeting of Shareholders (GMS). The distribution of dividends is the main objective in business, so it is necessary to obtain approval from shareholders through voting rights. Article 71 paragraph (2) of the PT Law explains that the amount of dividend distribution is generated after all of the company’s net profit is deducted from the allowance for reserves. In this case, the reserve is the profit retained for the company’s current and future business activities. In other words, the distribution of dividends as intended can only be done if the company has a positive balance of profit, namely where the entire amount of the company’s net profit or profit after deducting the accumulated losses of the previous financial year.
Types of Dividends
In general, there are five types of dividends distributed in accordance with the approval in the GMS, including the following:
Cash Dividend
Cash dividends are a type of dividend paid by the company to its shareholders in the form of cash. Cash dividends are one of the most common types of dividends paid by companies and are generally favored by shareholders. This cash dividend distribution will be adjusted to the number of shares owned by shareholders. In one year, companies can usually distribute cash dividends from two to four times per year depending on the distribution period. In general, this dividend can be paid in the form of other assets, but this type of dividend causes the most reduction in retained earnings and cash.
Stock Dividend
This type of dividend distribution in the form of the company’s own shares can also be called a stock dividend. Unlike cash dividends, investors will get an additional number of shares of the company so that there will be an increase in the number of shares owned. The distribution of stock dividends will also increase the number of shares in circulation without any change in the company’s liquidity position. Companies that distribute stock dividends are generally based on the following reasons:
- The limited availability of cash owned by the company
- The company is facing working capital difficulties
- Restrictions from creditors and others
Property Dividend
As the name implies, property dividends are paid with assets or assets other than company cash. It can be in the form of a house that has a value equivalent to the dividend approved by the shareholders’ meeting. This dividend is done because the company has a decrease in cash to pay cash dividends. This type of dividend is also rarely done because it is quite complicated and less favored by shareholders.
Liquidating Dividend
Liquidation dividend means the return of capital from a company to shareholders. In other words, if the company goes bankrupt, then the company also has the right to return capital shares to shareholders. The goal is that the company does not have debt or problems in the future.
Scrip Dividend
The scrip dividend payment method is to make a company debt promise to shareholders. A statement about the repayment or payment of debt that has been promised within a certain period of time.
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This scrip dividend means recognizing a new debt and must be recorded on the balance sheet. There is also interest, so the company is obliged to pay the interest as well as the debt to the shareholders.
What is the Mechanism of Dividend Distribution?
Provisions regarding the procedure for using company profits for dividend distribution are contained in Article 145 Paragraph (1) of the Company Law, which will be regulated in the Company’s Articles of Association (AD). The mechanism for paying or distributing company dividends to its investors is set out in Article 72 of the Company Law and is stated to have two ways, namely as follows:
Interim Dividend
Dividend distribution mechanism that is given in the period before the company’s financial books will be closed or the time is still running.
Final Dividend
Dividend distribution mechanism after the company’s financial accounting process is complete. These two mechanisms will be used simultaneously within 1 year. That way, investors will receive 2 dividends in 1 year.
The Importance of Contractual Agreements in Dividend Distribution
From the explanation above, it can be concluded that dividend distribution is one of the important aspects in the business world which is the main goal of the company. Dividend distribution not only reflects the positive performance of the company but also helps maintain investor confidence. When a company wants to give shares to other people or investors, an important step to take is to make a contract agreement. This agreement contract has an important role in regulating the distribution of rights and obligations among the parties involved, including the dividend distribution mechanism. It also includes what percentage of the company’s net profit will be distributed as dividends, when the dividends will be distributed, and how the dividends will be distributed. With a clear contractual agreement on dividend distribution, it can avoid ambiguity or different perceptions among the parties involved, including regulating conflict resolution mechanisms that may arise regarding dividend distribution.
KH Contact
This is an explanation of corporate dividends, starting from the definition, types, to the distribution mechanism. For KH pals who want to invest or invest in a company to get dividends and do not have an agreement contract, it’s good to start feeling it now. KH Friend can utilize Kontrak Hukum to help you make an investment agreement contract easily and quickly in just 3 days, 100% online without face to face.
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Let’s execute dividend distribution safely by creating a contract agreement at Kontrak Hukum! For information on ordering services, visit the KH Services – Contracts page. If you still have questions about other business needs, feel free to consult for free at Tanya KH or send a direct message (DM) to Instagram @kontrakhukum.
