Discretionary dividends are, as the name implies, dividends paid out to shareholders at the discretion of the board of directors. Because there is no law compelling boards to issue dividends for common stock, all dividends for common stock are discretionary. There are, however, other situations in which dividends are mandatory.
How It Works
In the case of common stock, the board of directors has the discretion to pay out profits to investors in the form of dividends or to reinvest the money in the firm. But a company may also issue preferred stock that guarantees certain dividends to be paid out -- similar to guaranteed payments from bonds. These dividends are non-discretionary because the board of directors is obligated to authorize them.