Define Dividend Order:

"Dividend order refers to the priority and sequence in which dividend payments are made to different classes of shareholders."

Explain Dividend Order:

Introduction:

Dividend order refers to the priority and sequence in which dividend payments are made to different classes of shareholders. When a company declares dividends, it must adhere to a specific order set by law and its corporate governance structure. Understanding the dividend order is crucial for shareholders to determine when they are eligible to receive dividends and the amount they can expect to receive.

Types of Shares and Dividend Priority:

1. Common Shares: Common shareholders are the owners of a company and have the lowest priority in receiving dividends. They are entitled to receive dividends only after all other classes of shareholders have been paid. Common shareholders typically receive dividends in proportion to their ownership stake in the company.

2. Preferred Shares: Preferred shareholders have a higher priority than common shareholders when it comes to receiving dividends. They are entitled to receive a fixed dividend amount or a predetermined dividend rate before any dividends are paid to common shareholders. Preferred shareholders have a preferential claim on dividends and are more assured of receiving consistent dividend payments.

3. Cumulative Preferred Shares: Some preferred shares come with cumulative dividend rights. If the company fails to pay dividends in a particular year, the unpaid dividends accumulate and become payable in the future when the company has sufficient profits to do so.

4. Non-Cumulative Preferred Shares: Non-cumulative preferred shares do not carry the right to accumulate unpaid dividends. If the company skips dividend payments, the missed dividends are not carried forward to future years.

Dividend Payment Process:

1. Declaration Date: The company's board of directors declares the dividend amount and sets the record date for determining the eligible shareholders.

2. Record Date: The record date is the cutoff date on which the company determines the shareholders who are entitled to receive dividends. Shareholders who own shares on or before the record date will receive dividends.

3. Ex-Dividend Date: After the record date is determined, the stock exchange sets an ex-dividend date, typically two business days before the record date. Investors who purchase shares after the ex-dividend date are not eligible to receive the current dividend payment.

4. Payment Date: On the payment date, the company distributes dividends to the eligible shareholders based on their holdings.

Conclusion:

Understanding the dividend order is essential for investors to assess the potential benefits of investing in a particular class of shares. Preferred shareholders, especially those with cumulative dividend rights, have a more secure position in terms of receiving dividends.

Common shareholders, on the other hand, receive dividends after other classes of shareholders are paid. It is important for investors to carefully review a company's dividend policy and the terms of its preferred shares to make informed investment decisions.