What Is a Cash Dividend?

A cash dividend is funds or money paid to stockholders generally as part of the corporation's current earnings or accumulated profits. The board of directors must declare the issuing of all dividends and decide if the dividend payment should remain the same or change. Long-term investors who want to maximize their gains can reinvest their dividends. Most brokers offer a choice to reinvest or accept cash dividends.

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What Is A Dividend?

Cash Dividend Explained

Cash dividends are a common way for companies to return capital to their shareholders in the form of periodic cash payments—typically, quarterly—but some stocks may pay these bonuses on a monthly, annual, or semiannual basis.

While many firms pay regular dividends, there are special cash dividends that are distributed to shareholders after certain nonrecurring events such as legal settlements or the borrowing of money for large, one-time cash distributions. Each company establishes its dividend policy and periodically assesses if a dividend cut or an increase is warranted. Cash dividends are paid on a per-share basis.

Key Takeaways

  • A cash dividend is a payment doled out by a company to its stockholders in the form of periodic distributions.
  • Cash dividends are often paid on a regular basis, such as monthly or quarterly, but are sometimes one-time-only payouts, such as after a settlement.
  • Most brokers offer a choice to accept or reinvest cash dividends; reinvesting dividends is often a smart choice for investors with a long-term focus.
  • Dividend-paying companies are typically established, with stable cash flow, and beyond the growth stage.

The 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 notification, the record date is established, which is the date on which a firm determines its shareholders on record who are eligible to receive the payment.

In addition, 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 before the ex-dividend date is entitled to the announced cash dividend.

Investors must report dividend earning, and they are taxable as income for the recipients; IRS Form 1099-DIV will list the total amount of reportable dividend earnings.

Which Companies Pay Dividends?

Companies that pay dividends typically enjoy stable cash flows, and their businesses are commonly beyond the growth stage. This business growth cycle 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 postponed to better times.

Cash dividends are a common way for companies to return capital to shareholders.

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 do not affect 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 in the financing activity section of their cash flow statement.

Comparing Cash Dividends

The easiest way to compare cash dividends across companies is to look at the 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 computation standardizes the measure of cash dividends concerning the price of a common share.

Cash Dividend Example

Nike is a mature firm that pays quarterly cash dividends. In February 2019, the famous sportswear brand announced a quarterly cash dividend of 22 cents per share on outstanding Class A and Class B Common Stock payable April 1, 2019.

The company had enjoyed increased revenues in the second quarter of 10 to 14%. Net income had increased by 10% compared to the same quarter in 2018, and diluted earnings per share had increased by 13% for the same period in 2018.