A property dividend involves a payment by a company in the form of a physical asset. Unlike a regular dividend-paying stock, this type of dividend does not pay its shareholders in cash. Instead, the company pays what investors know as a “payment-in-kind.” A company is likely to pay a property dividend if the company does not have enough cash to pay a regular dividend or if they do not wish to dilute their current shares.
An Example of a Property Dividend
Let’s say a company known as entity “A” has 20,000 shareholders. Entity A decides to distribute a property dividend to each of its shareholders on March 1 and to shareholders of record on February 20. The company’s asset is worth $1,000 to each of its shareholders. Multiplying the number of shareholders by the worth of each dividend gives a total asset value of $20 million dollars. Each individual shareholder may decide to hold onto the asset or to sell.
So what kind of non-cash asset can companies distribute to the shareholders? A company may decide to distribute samples of a product it sells to its shareholders. Or the company may decide to distribute shares of a subsidiary company to the shareholders. As long as the asset the company distributes is not cash, scrip, or shares, the investors consider the payment a property dividend.
How the Property Dividend Process Works
This type of dividend needs approval much like that of a cash dividend. The board of directors must approve the dividend. The company is also required to have the assets before the property dividend is declared. The company must record this type of dividend at fair market value. The fair market value can be determined by a professional appraisal, a quoted market price or a comparison to a similar asset. Finally, the company must recognize a gain or a loss once the asset is distributed.
You can learn about dividend taxation by checking out the IRS.gov website.
When to Consider a Property Dividend
So what is the advantage of receiving a non-cash dividend for the shareholder? A non-cash dividend can allow the shareholder to defer or reduce their taxes. Also, the shareholder can hold the asset without having to liquidate.
From the company’s perspective, this type of non-cash dividend can make sense if the fair market value of the asset is much different from the book value. The difference between the fair market value and the book value can allow the company some flexibility when reporting taxable income.