What is a 'Liquidating Dividend'

A liquidating dividend is a type of payment that a corporation makes to its shareholders during a partial or full liquidation. For the most part, this form of distribution is made from the company's capital base. As a return of capital, this distribution is typically not taxable for shareholders. A liquidating dividend is distinguished from regular dividends that are issued from the company's operating profits or retained earnings.

A liquidating dividend is also called liquidating distribution.

BREAKING DOWN 'Liquidating Dividend'

A liquidating dividend may be made in one or more installments. In the United States a corporation paying out liquidating dividends will issue a Form 1099-DIV to all of its shareholders that details the amount of the distribution.

Despite certain tax advantages, investors who receive liquidation dividends often find that these still do not cover their initial investment as the company’s fundamental quality has deteriorated.

Liquidating Dividend and Traditional Dividends

In general, with regular dividends, on and after the ex-dividend date, a seller is still entitled to the payout even if she/he has already sold it to a buyer. Essentially, a person who owns the security on the ex-dividend date will receive the distribution, regardless of who currently holds the stock. The ex-dividend date is typically set for two business days prior to the record date. This is due to the T+3 system of settlement financial markets presently use in North America.

For a regular dividend the declaration date or announcement date is when a company's board of directors announces a distribution. The payment date is when the company officially mails the dividend checks or credits them to investor accounts.

Liquidating Dividend and Liquidation Preference

In addition to a liquidating dividend, companies have a set order in which they must re-pay their owners in the event of a liquidation. Liquidation can occur when a company is insolvent and cannot pay its obligations when they come due, among other reasons. As company operations end, remaining assets go to existing creditors and shareholders. Each of these parties has a priority in the order of claims to company assets. The most senior claims belong to secured creditors, followed by unsecured creditors, including bondholders, the government (if the company owes taxes) and employees (if the company owes them unpaid wages or other obligations). Preferred and common shareholders receive any remaining assets, respectively.  

RELATED TERMS
  1. Unpaid Dividend

    A dividend that is owed to stockholders of record but has yet ...
  2. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
  3. Cash Dividend

    Money paid to stockholders, normally out of the corporation's ...
  4. Liquidation

    Liquidation is the process of bringing a business to an end and ...
  5. Ex-Dividend

    Ex-dividend is a classification in stock trading that indicates ...
  6. Dividend Rate

    The total expected dividend payments from an investment, fund ...
Related Articles
  1. 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.
  2. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  3. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  4. 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.
  5. Investing

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  6. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  7. 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.
  8. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
RELATED FAQS
  1. Who actually declares a dividend?

    Understand who actually declares a dividend when a company makes a dividend payment and how the payments of dividends appear ... Read Answer >>
  2. Why not buy just before the dividend, then sell?

    Buying a stock ahead of a dividend and selling right after usually doesn't work because the market often responds to dividend ... Read Answer >>
  3. What is liquidity management?

    Take a look at the different definitions of liquidity, and find out how investors and businesses attempt to reduce exposure ... Read Answer >>
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center