What is a Liquidating Dividend
Let me explain what a liquidating dividend is: it's a payment that a corporation makes to you as a shareholder during a partial or full liquidation. For the most part, this comes from the company's capital base. As a return of capital, you typically won't pay taxes on this distribution. You need to distinguish it from regular dividends, which come from the company's operating profits or retained earnings.
You might also hear it called a liquidating distribution.
Breaking Down Liquidating Dividend
A liquidating dividend can be paid out in one or more installments. If you're in the United States, the corporation will send you a Form 1099-DIV that details the amount of the distribution.
Even with the tax advantages, if you're an investor receiving these dividends, you often find they don't cover your initial investment because the company's fundamental quality has deteriorated.
Liquidating Dividend and Traditional Dividends
With regular dividends, on and after the ex-dividend date, the seller remains entitled to the payout even if they've sold the stock to a buyer. Essentially, if you own the security on the ex-dividend date, you'll receive the distribution, no matter who holds the stock now. The ex-dividend date is usually two business days before the record date, due to the T+3 settlement system used in North American financial markets.
For a regular dividend, the declaration date is when the board announces the distribution. The payment date is when the company mails the checks or credits your account.
Liquidating Dividend and Liquidation Preference
Beyond the liquidating dividend itself, companies follow a set order for repaying owners during liquidation. This can happen if the company is insolvent and can't meet its obligations, among other reasons. As operations end, remaining assets go to creditors and shareholders in priority order.
The most senior claims are with secured creditors, then unsecured creditors like bondholders, the government for taxes, and employees for unpaid wages or obligations. After that, preferred shareholders get what's left, followed by common shareholders.
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