What is a 'Capital Dividend'

A capital dividend is a type of payment a firm makes 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. A company will generally pay a capital dividend in instances where a dividend payment is required, but company earnings cannot facilitate such a cash payment.

Capital dividend is also known as a "return of capital."

BREAKING DOWN 'Capital Dividend'

A capital dividend is typically not taxable for shareholders, as it is viewed as a return of the capital that investors pay in. Capital dividends are not a preferred form of dividend payment for firms or investors, as they often indicate a company’s 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.

Capital Dividend and Regular Dividend Payment

A capital dividend and a traditional dividend differ in that a traditional dividend is distributed from a company's earnings. Traditional dividends may be issued as cash payments, shares of stock, or another form of property. A company’s board of directors (BoD) decides on the timeframes (generally monthly or quarterly) and payout rates for traditional dividends. A board may also distribute special dividends separately or together with a traditional, scheduled dividend.

Dividends are a form of reward for shareholders’ purchasing a stake in a company. Dividend payments usually indicate that a company is established and has consistent free cash flow. For this reason start-ups and other high-growth companies rarely offer dividends, preferring instead to put any profits back into research and development to continue higher-than-average expansion. Startups, particularly in the technology sector, often report losses in their early years.

In contrast, larger, more established companies consistent and predictable profits often pay the best dividend. Such companies, historically in basic materials, oil and gas, banks and financial, healthcare and pharmaceuticals, and utilities tend to issue regular dividends. Master limited partnerships (MLPs) and real estate investment trusts (REITs) are also top dividend payers.

Capital Dividend and Shareholders’ Equity

Capital dividends are drawn from a company’s shareholders' equity, which is equal to a firm's total assets minus its total liabilities. Shareholders' equity represents a company’s net value of a company. If all the company's assets were liquidated and all debts repaid, shareholders’ equity would be the amount that would be returned to shareholders.

RELATED TERMS
  1. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  2. Cash Dividend

    Cash dividend is the money paid to stockholders normally as a ...
  3. Property Dividend

    A property dividend is an alternative to cash or stock dividends. ...
  4. Dividend Policy

    Dividend policy structures the dividend payout a company distributes ...
  5. Final Dividend

    The final dividend is declared at a company's Annual General ...
  6. Cash-and-Stock Dividend

    A cash-and-stock dividend contains a portion of cash and a portion ...
Related Articles
  1. Investing

    Why Dividends Matter To Investors

    There is much evidence as to why dividends matter for investors, profitability in the form of a dividend check can help investors sleep easily. Learn more.
  2. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  3. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  4. Investing

    3 Dividend Trends in the S&P 500 Index (TSN, LUV)

    Analyzing recent financial performance of companies demonstrating an inclination to issue consistent dividends to shareholders on a quarterly basis.
  5. Financial Advisor

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
  6. Financial Advisor

    How mutual funds pay dividends: An overview

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  7. Investing

    WMT: Wal-Mart Dividend Analysis

    Wal-Mart raised its dividend for the 43rd consecutive year, despite losing over 25% of its market value in 2015, and its dividend remains healthy in 2016.
  8. Investing

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  9. Investing

    Dividend ETFs Sought for Solid Revenue Streams

    Dividends can be found with plenty of ETFs, but investors should study up before committing capital.
RELATED FAQS
  1. Cash Dividends or Stock Dividends: Which is better?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two types of dividends: cash ... Read Answer >>
  2. Are dividends considered assets?

    Find out why dividends are considered an asset for investors, but a liability for the company that issued them. Learn the ... Read Answer >>
  3. Can dividends be paid out monthly?

    Find out how stocks can pay dividends monthly and learn about the types of industries or companies that will most likely ... Read Answer >>
Trading Center