What Is a Capital Dividend?

A capital dividend, also called a return of capital, is a payment that a company makes to its investors that is drawn from its paid-in-capital or 澳洲幸运5开奖号码历史查询:shareholders' equity.

Regular dividends, by contrast, are paid from the company's earnings. A company generally will only pay a capital dividend when its earnings are insufficient to cover a required dividend payment, possibly indicating that a company is in trouble as its business operations are not generating a significant amount of earnings or any earnings at all.

Understanding a Capital Dividend

Payment of capital dividends is seen as a warning sign that a company is struggling to generate earnings and free cash flow. In fact, by paying out dividends from its 澳洲幸运5开奖号码历史查询:retained earnings, the company may be exacerbating its troubles by shrinking its 澳洲幸运5开奖号码历史查询:capital base and limiting its future 🍎investment and business opportunities. Dividends are only meant to be paid when a company is on a strong fin🧜ancial footing.

On the plus side, a capital dividend is 澳洲幸运5开奖号码历史查询:typically not taxable for the shareholder who receives it in the U.S. and C༺anada. It is viewed as a return of a portion of the money that investors paid in when they bo🍌ught shares. In fact, a capital dividend payment reduces the adjusted cost basis of the stock when it is .

A capital dividend can also refer to a dividend paid through the sale of an appreciating asset, which is more often a term used in Canada. For example, if a company sells an asset that has appreciated, it would have to pay 澳洲幸运5开奖号码历史查询:capital gains tax. The amount that is not taxed🐈 is placed into a capital dividend account from which shareholders are paid a capital dividend.

Capital dividends are drawn from a company’s shareholders' equity, which is a firm's total assets minus its total liabilities.

Shareholders' equity represents a company’s net value. If all the company's assets were liquidated and all its debts were repaid, shareholders’ equity would be the amount that would be returned to shareholders.

Capital Dividend vs. Regular Dividend

Traditional 澳洲幸运5开奖号码历史查询:dividends are considered 𝄹a share of a company's profits but they may be issued as cash payments, additional shares of stock, or another form of property.

A company’s board of directors decides on the type of payout, the amount of the payout, and the tim💦ing of it, generally monthly or quar🍨terly. The board may also distribute special dividends separately or together with a regularly scheduled dividend.

Dividends are a form of profit-sharing and a reward for a shareholder purchasing a stake in the company. A dividend payment usually indicates that a company is well established and is generating consistent 澳洲幸运5开奖号码历史查询:free cash flow.

Startup companies and high-growth ൩companies rarely offer dividends, preferring instead to ꧟put any profits back into research and development to continue that growth. In fact, startups, particularly in the technology sector, often report losses in their early years and are not able to pay out dividends.

Dividend Payers

In contrast, larger and better-established companies that enjoy consistent and predictable profits often pay the best dividends, such as 3M (MMM) and Coca-Cola (KO). T✱he dividends are an incentive for investors to buy and hold their shares since their stocks are rarely🧸 big gainers (or big losers) in the markets.

Investors that choose stocks that pay dividends are typically pursuing a 澳洲幸运5开奖号码历史查询:dividend investing strategy as opposed to a growth strategy. Historically, these divide🎐nd payers are found in sectors including utilities, basic materials, oil and gas, financials, healthcare, and pharmaceuticals. Many blue-chip companies pay dividends and witness little stock appreciation.

澳洲幸运5开奖号码历史查询:Master limited partnerships (MLPs) and 澳洲幸运5开奖号码历史查询:real estate investment trusts (REITs) are also top dividend payers.