While normal dividends are never prorated, there are occasions when a prorated dividend is paid. Prorated dividends are announced as such in the dividend declaration but that doesn’t always prevent investor confusion.
Prorated dividends can be confusing at first for two reasons. One, because they are relatively rare, and two, because they are handled somewhat differently from normal dividends. The reason they’re handled differently is because all shareholders of the same class of stock who qualify for a dividend must be paid the entire dividend, regardless of how long they held the stock.
We’ll see how prorated dividends are handled a bit further down the page but first we need to know what a prorated dividend is.
What Is A Prorated Dividend?
As applied to dividend payments, proration is the paying of a portion of a dividend rather than the full amount, that portion being proportional to the amount of time the stock was held by the owner in a specific dividend period.
For example, in a case of a quarterly dividend period (three months) a stockholder who held the stock for one month would receive one third of that quarter’s dividend payment.
When Is A Prorated Dividend Used?
There are two primary circumstances under which a dividend is prorated and the process of paying a prorated dividend is essentially the same in both circumstances, the only difference being that in the second circumstance the process is used twice instead of only once.
One circumstance is in the case of a company’s initial dividend. Not often, but occasionally, a company will go public with a regularly scheduled dividend. Rarely will a company go public on the first day of its dividend period, so the first regular dividend is paid proportionately, according to how many days the company was publicly traded before the first scheduled dividend payment.
As an example, Kinder Morgan, for their first dividend as a public company, paid a prorated dividend as announced in their press release on April 20, 2011:
“The board of directors declared a prorated dividend for the first quarter of $0.14 per share, payable on May 16, 2011, to shareholders of record as of May 2, 2011. The initial dividend is prorated from Feb. 16, 2011, the day that KMI closed its initial public offering. Based on a full quarter, the dividend amounts to $0.29 per share ($1.16 annualized).”
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