Property dividends aren’t as common as cash dividends. Learn more about how they work here.
Definition and Example of a Property Dividend
A property dividend is a type of dividend made up of an asset instead of cash. Companies can choose to pay investors with an asset, such as a product, by calculating what the market value of that product is. They then determine how much product they must send the investor to equate to the value of the dividend. Companies typically choose to issue property dividends when they don’t have enough cash available to pay out cash dividends. They may also choose to go the route of property dividends if the company doesn’t want to dilute their current share position by distributing regular dividends. A company may go the route of a property dividend if the fair market value of the asset in question is very different from its book value. Let’s say the Acme company has stored 1,000 limited-edition Warhol art prints signed by the artist. The company spent $1,000,000 to acquire these art prints. Their fair market value is $8,000,000 when the date of dividend declaration arrives. The Acme company now has $8,000,000 worth of assets to issue as property dividends in lieu of cash or stock. You can see below how Acme would record the change in the value of assets and the liability to pay the dividends: When a company releases property dividends, it’s generally a sign that it doesn’t have enough cash or stock available to issue considerable payouts. It may also be a sign that they don’t want to liquidate their current shareholdings. Property dividends still have monetary value even though they’re a non-monetary type of dividend. Property dividends are also able to assist with taxes by reducing or deferring them. Receiving an appreciated property can lead to a lesser tax amount than if you were to sell the property to issue a cash dividend. This is why companies prefer to issue property dividends if the assets’ fair market values are very different from their book values. The investors can benefit because they’re able to hold onto the assets for an extended time period without being required to liquidate them. These dividends can be issued in the form of assets such as real estate, investment stocks, and even physical assets or inventory. The shareholder can choose to hold the asset to achieve future long-term gains, which can be a good option for an investor looking to make a long-term investment. The fair market value of the asset varies from the book value, so the company will be required to record that price difference as either a loss or gain. In light of this requirement, some companies choose to issue property dividends with the intent of changing the taxable and operating income.
What Does This Mean for Investors?
If you’re an investor looking to earn dividends to help grow your wealth, it’s important to know the different types of dividends. If you’re offered a property dividend instead of a cash dividend, you’ll want to know how the value of that dividend works. You’ll also want to decide whether to hold the property dividend as a long-term investment or not. It may be a positive asset to your portfolio, or you may find that it doesn’t fit with your investment strategy. Consider all of your options when it comes to dividend investing before deciding which path is right for you.
