What Does "Cutting a Melon" Mean?

Malcolm Tatum

As it relates to the world of investing, "cutting a melon" is a type of slang term that has to do with the issuance of an dividend to investors above and beyond a dividend payment that would normally be issued to investors. In most cases, this additional dividend is issued as a separate payment after the scheduled dividend has been extended to investors. While cutting the melon may involve providing a cash dividend, the company may also choose to extend this extra payment to investors in the form of shares of stock or some other form of property.

Sliced melons, which inspired the term "cutting a melon.".
Sliced melons, which inspired the term "cutting a melon.".

The reference to cutting a melon is a fanciful way of noting that when this happens, the investors are receiving something that is above and beyond the returns they are already anticipating. In a sense, a company that chooses to cut a melon is in fact delivering something to investors that is a bit of a bonus. From this perspective, this extra dividend is somewhat like enjoying a nice cut of a melon after consuming a satisfying meal, making the overall experience of the investor a little sweeter.

As with the issuance of any type of dividends, the board of directors of a company will determine whether or not cutting a melon is appropriate at any given point in time. Most companies have specific guidelines for issuing dividend payments on some sort of consistent schedule, such as quarterly, semi-annually, or annually. In the event that the success of the company warrants issuing an additional dividend payment to stockholders in between those scheduled disbursements, then the board of directors will review the situation, determine if the disbursement of an extra payment is in the best interests of all concerned, then proceed with the process of cutting a melon and issuing whatever type of dividend is considered appropriate.

It is important to note that companies do not have to engage in the task of cutting a melon. This measure is normally utilized when a business generates income that was not anticipated. Even then, the extra dividend payment is usually associated with the same period as a scheduled payment to investors, an approach that helps to keep the accounting records coherent and easier to evaluate. Companies do not tend to issue additional dividends without taking the time to determine the impact of that action on the company as a whole. This means that even if additional income is generated, the board of directors may find that diverting the funds toward settling debt or to some other measure that strengthens the market position of the company may in fact be more beneficial to both the company and the investors in the long run, rather than providing an additional benefit each time there is a surplus of income.

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