A dividend is a payment made by a company (or sometimes other types of entities, like mutual funds or real estate investment trusts) to its shareholders out of its earnings or profits. Dividends are typically distributed on a regular basis, often quarterly, although the frequency can vary depending on the company's policies.

Dividends are a way for companies to share a portion of their financial success with their shareholders. When a company earns a profit, it can choose to reinvest that profit into the business for growth, pay down debt, or distribute a portion of it to its shareholders in the form of dividends. Dividends can be paid in either cash or additional shares of stock, depending on the company's preference and financial situation. Cash dividends are the most common form of dividend payment.

Types of Dividend

Cash Dividends:

When a company declares a cash dividend, it distributes a specific amount of money to its shareholders for each share they own. Shareholders receive the dividend payment in the form of cash, typically through a check, electronic transfer, or dividend reinvestment plan (DRIP).

Cash dividends provide shareholders with immediate income that they can use as they see fit, whether for living expenses or reinvestment in other assets.

Stock Dividends 

Also known as Bonus Shares or Scrip Dividends, in this type of dividend, instead of distributing cash, a company may issue additional shares of its own stock as dividends to existing shareholders. This increases the number of shares each shareholder holds. Shareholders receive additional shares of the company's stock in proportion to their existing holdings. Stock dividends do not involve the outflow of cash from the company, which can be beneficial if the company wants to conserve cash for other purposes. However, they do dilute the ownership percentage of existing shareholders.

Stock Split

While not a traditional dividend, a stock split involves a company dividing its existing shares into multiple new shares. It is often used to lower the stock price per share and increase liquidity.

Shareholders receive more shares, but the total value of their investment remains the same. A stock split can make shares more affordable to a wider range of investors and increase trading activity.

Special Dividends

Special dividends are one-time, non-recurring dividend payments made by a company in addition to its regular dividends. These are often paid when a company has excess cash or profits. Shareholders receive an extra dividend payment, which is typically larger than the regular dividend. Special dividends are a way for a company to reward shareholders with unexpected windfalls of cash.

Preferred Stock Dividends

Some companies issue preferred stock, which comes with a fixed dividend rate. Preferred stockholders receive dividends before common stockholders and usually at a specified rate.

Payment: Preferred stockholders receive their dividends in cash or additional preferred shares. Preferred stock dividends provide a predictable income stream for investors in these shares.

Formulae

The percentage of dividends to be paid by a company is determined by its dividend policy, which is typically established by the company's board of directors. So to calculate the total dividend, 

Dividend = Number of Shares * Value per share * Dividend percentage

Dividend Per Share (DPS)

DPS is the amount of dividend paid per share of stock. 

DPS = Total Dividends Paid / Number of Outstanding Shares

Dividend Yield

Dividend Yield is a measure of the dividend income generated by an investment relative to its market price. 

Dividend Yield = (DPS / Market Price per Share) * 100

Dividend Payout Ratio

The dividend payout ratio measures the percentage of earnings that a company distributes to its shareholders in the form of dividends. 

Dividend Payout Ratio = (Dividends Paid / Earnings) * 100

Example

Let us take the example of a hypothetical Company ABC - a publicly traded company in India, and we'll assume it has the following financial information for the financial year ending March 31, 2023:

• Net Profit After Tax (NPAT): Rs 100 crore
• Number of Outstanding Shares: 10 crore
• Market Price per Share: Rs 50
• Dividends Paid: Rs 30 crore

Dividend Per Share (DPS):

DPS = Total Dividends Paid / Number of Outstanding Shares

DPS = Rs 30,00,00,000 / 10,00,00,000 shares

DPS = Rs 3 per share

So, Company ABC paid a dividend of Rs 3 per share to its shareholders for the financial year ending March 31, 2023.

It is to be noted that whether or not a company pays dividends is a decision made by the company's board of directors and is influenced by various factors, including the company's financial performance, profitability, capital requirements, and overall dividend policy.