Cash Dividend

Loading the player...

What is a 'Cash Dividend'

A cash dividend is money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors, and they are taxable as income to the recipients.

Long-term investors who want to maximize their gains should consider reinvesting their dividends. Most brokers offer a choice to reinvest or take cash dividends.

BREAKING DOWN 'Cash Dividend'

Cash dividends are a common way for companies to return capital to their shareholders in the form of periodic cash payments, generally each quarter. While many firms pay regular dividends, there are special cash dividends that are distributed to shareholders after certain non-recurring events, such as legal settlements or borrowing money to make large one-time cash distributions. Each company establishes its own dividend policy and periodically assesses if a dividend cut or an increase is warranted. Cash dividends are paid on a per-share basis.

Timing of Cash Dividends

A company's board of directors announces a cash dividend on a declaration date, which entails paying a certain amount of money per common share. After that, a record date is established, which is the date on which a firm determines its shareholders on record. Also, stock exchanges or other appropriate securities organizations determine an ex-dividend date, which is typically two business days before the record date. An investor who bought common shares prior to the ex-dividend date is entitled to the announced cash dividend.

Characteristics of Dividend-Paying Companies

Companies that pay dividends typically enjoy stable cash flows, and their businesses are commonly beyond their growth stages. This partially explains why growth firms do not pay dividends; they need these funds to expand their operations, build factories and increase their personnel. Certain dividend-paying companies may go as far as establishing dividend payout targets, which are based on generated profits in a given year. For example, banks typically pay out a certain percentage of their profits in the form of cash dividends. If profits decline, dividend policy can be scrapped until better times.

Accounting for Cash Dividends

When a corporation declares a dividend, it debits its retained earnings and credits a liability account called dividend payable. On the date of payment, the company reverses the dividend payable with a debit entry and credits its cash account for the respective cash outflow. Cash dividends have no effect on a company's income statement. However, they shrink a company's shareholders' equity and cash balance by the same amount. Firms must report any cash dividend as payments at the financing activity section of their cash flow statement.

Comparing Cash Dividends Across Firms

The easiest way to compare cash dividends across companies is to look at trailing 12-month dividend yields, which are computed as a company's dividends per share for the most recent 12-month period divided by its current stock price. This standardizes the measure of cash dividends in relation to the price of a common share.

RELATED TERMS
  1. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  2. Dividend Policy

    The policy a company uses to decide how much it will pay out ...
  3. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...
  4. Property Dividend

    An alternative to cash or stock dividends. A property dividend ...
  5. Cash-And-Stock Dividend

    A corporation distributing earnings to its shareholders as both ...
  6. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
Related Articles
  1. Investing

    Introduction To Dividends: Terms To Know And Other Basics

    Cash DividendCash payments made to stockholders, paid on a per share basis, quoted as a dollar amount or as a percentage of the current market value. Cash dividends are typically paid out of ...
  2. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  3. Markets

    How Dividends Affect Stock Prices

    Find out how dividends affect the price of the underlying stock, the role of market psychology and how to predict price changes after dividend declaration.
  4. Investing

    Dissecting Declarations, Ex-Dividends and Record Dates

    Understanding the dates of the dividend payout process can be tricky. We clear up the confusion.
  5. Markets

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
  6. Investing

    Introduction To Dividends: Introduction

    A dividend is a distribution of a portion of a company's earnings to a class of its shareholders. Dividends can be in the form of cash, stock, and less commonly, property. Most stable companies ...
  7. Investing

    Introduction To Dividends: Doing Your Homework And Taxes

    Similar to any other investments, it is important to perform due diligence prior to making any dividend-related decisions. There are several factors to consider when researching and selecting ...
  8. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  9. Managing Wealth

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  10. Markets

    4 Ratios to Evaluate Dividend Stocks

    Discover details about fundamental analysis ratios that could help to evaluate dividend paying stocks, and learn how to calculate these ratios.
RELATED FAQS
  1. Do dividends affect working capital?

    Learn about cash dividends and how they affect a company's working capital through the reduction of cash or recording a dividends ... Read Answer >>
  2. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  3. Do dividends go on the balance sheet?

    Learn about dividends and which accounts on a company's balance sheet they affect, such as cash, shareholders' equity and ... Read Answer >>
  4. Who actually declares a dividend?

    Understand who actually declares a dividend when a company makes a dividend payment and how the payments of dividends appear ... Read Answer >>
  5. If I reinvest my dividends, are they still taxable?

    Take a brief look at how the Internal Revenue Service taxes different kinds of dividends, including taxation on dividends ... Read Answer >>
  6. How do dividends affect the balance sheet?

    Learn how different types of dividends, such as cash dividends and stock dividends, affect a company's balance sheet, based ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center