Special Dividend Meaning Reasons How It Works

Special Dividend Meaning

The special dividend amount is paid out of companies’ disinvestment or sale of the company’s fixed assets. That is why the amount of dividend seems to be very high compared to the regular dividend, as it is one-time or non-recurringNon-recurringNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.read more payments made by the company. The company finalizes its decision by conducting a board meeting. It decides the amount or percentage at which the dividend will be declared and paid to the shareholders.

Reasons

When the company has surplus cash in hand and wants to reduce the same, then in that situation, the company may declare a special dividend to reduce such cash balances.If the company wants to change its debt and equity capital structure, it may declare a dividend to shareholders.It is generally seen that in a situation where the company wants to utilize surplus funds and does not want to buy back or pay out its obligations, then in that situation also, the company chooses the option of declaring such a dividend.

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Rules of Special Dividend

The rules and guidelines are much easier as compared to the regular dividend. Generally, it is seen that the company at first declares the dividend and then records the same in the books. And after that, it pays it to the shareholders of the company. In this case, the shareholder holding shares on the record date will receive the dividend, whether he is a shareholder or not, on the payment date. However, in case of a special dividend, anyone holding shares on the declaration date will receive a dividend.

Steps to Declare Special Dividend

Journal Entries

Suppose a company has declared a special dividend of $1 per share on its 50,000,000 shares on the date 01st January 2020, which is payable on 15th January 2020; then the journal entries are as follows:

The basic and preliminary step to declare any kind of dividend is to analyze the position of business net profits. After that, if the management wants to declare dividends, then they have to conduct a board meeting to vote upon and finalize the decision. While deciding the amount or percentage to be declared as dividends, one must also analyze the industry norms and patterns in which the entity operates. Finally, declare and distribute the amount of special dividend to the shareholders of the company.

The amount to be paid is $(50,000,000 * 1) i.e. $50,000,000. The company at first makes provision or transfer the due amount to the payables amount from the total reserves and surplusesReserves And SurplusesReserves and Surplus is the amount kept aside from the profits that are to be used either for the business or for the shareholders to pay out dividends. Reserves and surplus is reflected under shareholders funds in the balance sheet.read more available with the company. After that, the same would be paid to the company’s shareholders from such a provided or transferred account. After payment of such a dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more amount, the balance remaining in the payable account would be zero as the provided amount was paid to the company’s shareholders.

On 1st January 2020 the following entry is to be passed:

On 15th January 2020 the final entry of payment is to be passed:

Impact

The price of shares first rises then after payment of dividends, i.e., ex-dividend the price of shares fall.Generally, it was seen that some shareholders buy shares of the company for the sake of receiving dividend income and sell instantly as and when the dividend is recorded in the books, so it was seen that heavy selling of shares was seen.

Special vs. Regular Dividend

The regular dividend is declared by the company yearly to maintain the company’s trend and is also formed under an analysis of financial results; on the other hand, the special dividend is non-recurring and is declared only once by the company.The finalization of books of accounts is mandatory in case of a regular dividend, but in case of a special dividend, it does not require the finalization of accounts.The regular dividend can only be declared and paid after the end of the year, but in the case of a special dividend, it can be declared and paid at any time during the year.

Advantages

It increases the company’s market share as when the company declares such a kind of dividend, the market value per share sharply rises.When the company declares a special dividend, that itself means that the company has fulfilled the expectations of the shareholders of the company;

Disadvantages

It may create an image in the mind of shareholders that the company does not have any investment opportunities.When the company does not have enough funds to invest such funds shortly, then in that situation also the company declares a dividend, which means special dividends have very high opportunity costs.

Conclusion

When a company wants to make a distinctive image in the market and has also earned profits above the management’s expectations, they decide to distribute some as a special dividend to shareholders. It’s a one-time amount declared by the company to the shareholders. It also creates a good mindset about the company’s financials, as seen from the perspective of shareholders and lenders of the company.