A Cash Dividend: What Is It?
A cash dividend is a payment made from the corporation’s current earnings or accumulated profits to stockholders in general.
Instead of being distributed as a stock dividend or another kind of value, cash dividends are paid in cash. Most brokers provide you the option to collect dividends in cash or reinvest them.
Key Points
- A cash dividend is a sum of money distributed on a regular basis to stockholders by a firm.
- Cash dividends are frequently distributed on a regular schedule, like monthly or quarterly, but they can also be one-time payments, as after a settlement, on occasion.
- Cash dividends can typically be accepted or reinvested with most brokers.
- Companies that pay dividends are often well-established, have consistent cash flow, and have passed the growth stage.
- DRIPs, or dividend reinvestment programmes, are becoming more and more popular among businesses and brokers.
How a Cash Dividend Works
Cash dividends are a popular method for businesses to return money to their shareholders in the form of regular cash payments; these dividends are commonly distributed quarterly, however some equities may distribute them monthly, annually, or semiannually.
There are special cash dividends that are paid to shareholders after certain one-time occurrences, such as court settlements or the borrowing of funds for sizable, one-time cash payouts, even though many businesses pay regular dividends. Each company creates its dividend policy and evaluates whether a dividend decrease or raise is necessary on a recurring basis. On a per-share basis, cash dividends are paid.
When Cash Dividends Are Paid?
On a declaration day, the board of directors of a corporation declares a cash dividend that will be paid at a certain rate per common share. The record date, which is the date on which a firm determines which of its shareholders on record are qualified to receive the payment, is established after that announcement.
In addition, ex-dividend dates, which are normally set two business days prior to the record date, are decided by stock exchanges or other suitable securities institutions. Investors are eligible for the declared cash dividend if they purchased common shares prior to the ex-dividend date.
Which Companies Pay Dividends?
Businesses that pay dividends frequently have predictable cash flows and are typically beyond the growth stage. This corporate growth cycle helps to partially explain why growth corporations do not pay dividends since they require the money for business expansion, factory construction, and employee growth.
Some organisations that pay dividends may even set dividend payout targets based on the amount of profits they expect to produce each year. For instance, banks often distribute a specific proportion of their profits as cash dividends. The dividend policy may be changed or delayed till a time of higher earnings.
Accounting for Cash Dividends
When a company declares a dividend, it charges a liability account called dividend payable and debits its retained earnings. The business reverses the dividend payable with a debit entry on the day of payment and credits its cash account for the associated cash outflow.
The income statement of a firm is unaffected by cash dividends. However, they reduce the cash balance and shareholders’ equity of a corporation by the same amount. Any cash dividend must be reported by businesses as payments in the cash flow statement’s section devoted to financing activities.
Looking at trailing 12-month (TTM) dividend yields, which are calculated as a company’s payouts per share for the most recent 12-month period divided by its current stock price, is the simplest way to compare cash dividends among different firms. With the help of this calculation, the value of cash dividends in relation to the cost of a common share is standardised.