Capital Dividend

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DEFINITION

A type of payment by a firm to its investors that is drawn from a company's paid-in-capital or shareholders' equity, rather than from the company's earnings, as with regular dividends. Such a dividend is often paid out in instances where a dividend payment is required, but company earnings cannot facilitate such a cash payment.


Also known as a "return of capital".



INVESTOPEDIA EXPLAINS

A capital dividend is typically not taxable for shareholders, as it is viewed as a return of the capital paid in by investors. Capital dividends are not a preferred form of dividend payment for firms or investors, as they are often seen as a sign of a company struggling to generate earnings and free cash flow. Additionally, by paying out dividends from retained earnings, a company's struggles may worsen as its capital base shrinks, limiting investment and business opportunities in the future.


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