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Why Would a Company Use Liquidating Dividends?

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Leading UK
Why Would a Company Use Liquidating Dividends?

As a shareholder of a company, you can expect to receive annual dividends. These are a distribution to shareholders of the company’s profit, which are normally paid from the company’s retained earnings. However, as a shareholder you may receive what are known as liquidating dividends. But what are liquidating dividends and when would a company pay their shareholders in this way?

What are liquidating dividends?

Dividends are a share of a company’s profits that is paid to shareholders, usually annually, based on the number of shares held by each individual shareholder. The value of a share is based on its market value, i.e. how much each share is worth according to the financial markets. So, for example, if the market values each share at £3 and a shareholder holds 1,000 shares, they will receive a dividend of £3,000.

These are known as regular dividends and are paid from the company’s retained earnings, i.e. the profit made in that year of operation. However, if a solvent company is being liquidated, shareholders will receive what are known as liquidated dividends.

These dividends are a combination of the company’s retained earnings whilst it was trading, and an amount from its capital based, i.e. the shareholders original investment. So, the shareholder will receive their original investment back and a share of the company’s liquidated profits. 

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