Definition
A Bonus Dividend is a special, additional dividend issued to shareholders on top of the regular expected dividends. Companies typically pay out dividends on a biannual basis, but in cases where there are surplus profits or significant corporate events, such as a takeover, an extra dividend may be issued. This extra payment is intended to reward shareholders beyond the ordinary distribution of profits.
Examples
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Exceptional Profits: If a company experiences an exceptionally profitable year, it may decide to distribute an extra dividend to shareholders to share the wealth.
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Takeover Situation: When a company is taken over by another firm, the acquiring company might issue a bonus dividend to reward the shareholders of the acquired company.
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Asset Sales: When a company sells a significant portion of its assets and realizes a substantial gain, it might choose to issue a bonus dividend to distribute the profits to shareholders.
Frequently Asked Questions (FAQs)
What is the difference between a regular dividend and a bonus dividend?
A regular dividend is part of a company’s routine profit distribution to shareholders, typically paid semi-annually or quarterly. A bonus dividend, on the other hand, is a special, additional distribution made under extraordinary circumstances.
Why do companies issue bonus dividends?
Companies may issue bonus dividends to reward shareholders when they achieve exceptional profits, during special circumstances like a takeover, or after liquidating significant assets.
How often are bonus dividends paid?
Bonus dividends are not paid on a regular schedule. They are issued sporadically whenever the company has surplus funds or particular events justify the additional distribution.
Are bonus dividends taxable?
Generally, bonus dividends are taxed in the same manner as regular dividends. The specific tax implications can vary depending on the jurisdiction and individual tax situation.
Can any company issue a bonus dividend?
While any company can theoretically issue a bonus dividend, it is more common among well-performing companies or those undergoing significant corporate events that generate excess profits.
- Regular Dividend: The usual distribution of a company’s earnings to its shareholders, typically paid out quarterly or semi-annually.
- Special Dividend: A one-time dividend payment distributed due to exceptional circumstances, similar to a bonus dividend.
- Extraordinary Gain: Profits from unusual or infrequent transactions that are not part of the company’s regular operations.
- Shareholder Returns: The gains or benefits received by shareholders from owning shares in a company, including dividends and capital gains.
Online References
- Investopedia: Dividend
- The Balance: What Are Dividends?
- Corporate Finance Institute: Types of Dividends
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham - A book that covers the philosophy of value investing and the behavior of financial markets, including insights into dividends.
- “Common Stocks and Uncommon Profits” by Philip Fisher - Discusses investment strategies and includes information on evaluating dividends.
- “Security Analysis” by Benjamin Graham and David Dodd - Offers comprehensive insights into investment decision-making, including corporate dividends.
- “Dividends Still Don’t Lie” by Kelley Wright - Focuses on the importance and sustained relevance of dividends in investment strategies.
Accounting Basics: “Bonus Dividend” Fundamentals Quiz
### What is a bonus dividend?
- [ ] The typical dividend paid quarterly to shareholders.
- [x] An extra dividend issued in addition to regular dividends.
- [ ] A compulsory payment made to bondholders.
- [ ] A dividend paid only to new shareholders.
> **Explanation:** A bonus dividend is an additional dividend issued to shareholders in addition to the regular dividends they receive, often paid due to extraordinary circumstances like high profits or a takeover.
### When might a company issue a bonus dividend?
- [ ] During periods of financial difficulty.
- [x] After experiencing exceptional profits.
- [ ] When its stock price decreases.
- [ ] During routine quarterly earnings reports.
> **Explanation:** A company might issue a bonus dividend after experiencing exceptional profits or due to extraordinary situations like a takeover or significant asset sales.
### Are bonus dividends issued regularly?
- [ ] Yes, they are issued every quarter.
- [ ] Yes, they are issued semi-annually.
- [ ] Yes, they follow a strict annual schedule.
- [x] No, they are issued sporadically.
> **Explanation:** Bonus dividends are issued sporadically and only under extraordinary circumstances such as surplus profits or special events like takeovers.
### How are bonus dividends typically funded?
- [ ] From shareholder contributions.
- [ ] Through loans.
- [ ] From regular operational profits.
- [x] From surplus profits or special events.
> **Explanation:** Bonus dividends are typically funded from surplus profits or from specific events that yield extraordinary gains, such as asset sales or mergers.
### Why do companies issue bonus dividends?
- [ ] To improve quarterly reports.
- [ ] To reduce share prices.
- [x] To reward shareholders during extraordinary circumstances.
- [ ] To attract new investors.
> **Explanation:** Companies issue bonus dividends to reward shareholders during extraordinary circumstances, such as extremely profitable periods or significant corporate events.
### Who sets the amount of a bonus dividend?
- [ ] The shareholders.
- [x] The company's board of directors.
- [ ] The Securities and Exchange Commission (SEC).
- [ ] Independent auditors.
> **Explanation:** The amount of a bonus dividend is set by the company's board of directors after evaluating the financial situation and extraordinary gains.
### Are bonus dividends taxable?
- [x] Yes, they are generally taxed like regular dividends.
- [ ] No, they are tax-exempt.
- [ ] Only if they exceed a certain threshold.
- [ ] It depends on shareholder preferences.
> **Explanation:** Bonus dividends are generally treated like regular dividends for tax purposes and are subject to taxation depending on the jurisdiction and individual tax circumstances.
### What is a common event that might lead to the issuance of a bonus dividend?
- [ ] A decrease in market demand.
- [ ] An unexpected financial loss.
- [x] A corporate takeover.
- [ ] Routine payroll updates.
> **Explanation:** A corporate takeover is a common event that might lead to the issuance of a bonus dividend, rewarding shareholders with extra income.
### What must typically happen before a bonus dividend is issued?
- [x] Approval from the board of directors.
- [ ] Approval from the shareholders.
- [ ] Notification to the IRS.
- [ ] Approval from major banks.
> **Explanation:** Before a bonus dividend is issued, it must typically be approved by the company's board of directors, who assess the financial situation and the need for additional payouts.
### How does a bonus dividend benefit shareholders?
- [ ] By increasing share prices dramatically.
- [ ] By reducing their overall investment.
- [x] By providing extra income beyond regular dividends.
- [ ] By ensuring guaranteed returns with no risks.
> **Explanation:** A bonus dividend benefits shareholders by providing extra income beyond the regular dividends, often derived from extraordinary profits or special corporate events.
Thank you for enhancing your understanding of financial principles with our comprehensive bonus dividend guide and challenging sample exam quiz questions. Continue pursuing excellence in your financial education!
