What is Residual Dividend?
968 reads · Last updated: December 5, 2024
A residual dividend is a dividend policy used by companies whereby the amount of dividends paid to shareholders amounts to what profits are left over after the company has paid for its capital expenditures (CapEx) and working capital costs.Companies that use a residual dividend policy fund CapEx with available earnings before paying dividends to shareholders. This means the dollar amount of dividends paid to investors each year will vary.
Definition
The residual dividend is a dividend policy used by companies where dividends are paid to shareholders from the remaining profits after covering capital expenditures and working capital expenses. Companies adopting a residual dividend policy use available surplus funds to finance capital expenditures before paying dividends to shareholders. This means the amount of dividends paid to investors each year may vary.
Origin
The concept of the residual dividend policy originated in the mid-20th century, emerging alongside the development of corporate financial management theories. Its purpose is to find a balance between internal company investment and shareholder returns, ensuring that the company can meet capital needs while also providing reasonable returns to shareholders.
Categories and Features
There are mainly two types of residual dividend policies: fixed residual dividends and variable residual dividends. Fixed residual dividends involve paying a fixed percentage of remaining profits as dividends after meeting capital expenditures, while variable residual dividends change according to the varying remaining profits each year. The main feature is high flexibility, allowing dividend payments to adjust based on the company's profitability, but it may also lead to uncertainty in shareholder income.
Case Studies
A typical example is Apple Inc., which, during its rapid expansion and technology development phase, adopted a similar residual dividend policy, reinvesting most of its profits rather than paying high dividends. Another example is Amazon, which has long reinvested profits into business expansion and technological innovation, resulting in lower dividends for shareholders but significant growth in company value and stock price.
Common Issues
Common issues investors face with residual dividend policies include the instability of dividends and reliance on the company's profitability. Since dividend amounts may vary each year, investors need to pay attention to the company's financial status and future profit expectations. Additionally, while residual dividend policies may lead to lower short-term shareholder returns, they can contribute to increased company value in the long term.
