A cash dividend represents the distribution of funds or money paid to stockholders, generally stemming from a corporation’s current earnings or accumulated profits.
Cash dividends differ from stock dividends in that they are paid directly in money. Brokers typically provide the option to either reinvest or accept cash dividends.
Key Takeaways
- Direct Payment: Cash dividends are direct payments made by a company to its stockholders periodically, in contrast to stock or other forms of value.
- Regular Payments: These dividends are often distributed regularly, such as monthly or quarterly, with occasional one-time payouts following specific events.
- Reinvestment Options: Most brokers provide the choice to reinvest or accept cash dividends.
- Stable Companies: Dividend-paying companies are generally established entities with stable cash flows and are often past the growth stage.
- Dividend Reinvestment Plans (DRIPs): Increasingly, DRIPs are common among companies and brokers.
How a Cash Dividend Works
Cash dividends are a popular method for companies to return capital to their shareholders through periodic cash payments—typically quarterly, but sometimes monthly, annual, or semiannual.
While many firms commit to regular dividends, others may offer special cash dividends after certain nonrecurring events such as legal settlements or significant borrowings. Each company defines its dividend policy and periodically reviews whether adjustments are necessary. Cash dividends are paid on a per-share basis.
Timing of Cash Dividends
A company’s board of directors declares a cash dividend on a declaration date, which commits to paying a certain amount per common share. Following the declaration date, a record date is established, identifying which shareholders are eligible for the payment.
Stock exchanges or related authorities determine an ex-dividend date, typically two business days before the record date. Investors who purchase shares before the ex-dividend date are entitled to the announced cash dividend. Thus, dividend earnings are reported and taxed as income, detailed on IRS Form 1099-DIV.
Which Companies Pay Dividends?
Companies that pay dividends generally have stable cash flows and are beyond their growth phases. Growth companies typically do not pay dividends, as they require capital to expand. Some dividend-paying companies establish payout targets based on annual profits. For example, banks may pay a percentage of their profits as cash dividends. If profits decrease, companies might adjust or postpone their dividend policy.
Accounting for Cash Dividends
Upon declaring a dividend, a corporation debits its retained earnings and credits a liability account labeled as dividend payable. When payment is made, the company reverses this with a debit entry and credits its cash account for the outflow. Though dividends impact shareholders’ equity and cash balances, they do not affect the income statement. Cash dividends must be reported in the financing activity section of the cash flow statement.
To compare cash dividends, analyze the trailing 12-month (TTM) dividend yields, which are dividends per share over the last 12 months divided by the current stock price. This standardizes the measure concerning the price of a common share.
Illustrated Example: Nike
Nike, a mature firm, pays quarterly cash dividends. In February 2022, Nike announced a $0.305 per share quarterly cash dividend, payable on April 1, 2022. For fiscal year 2021, Nike recorded a year-over-year revenue increase of 19.3%, with earnings per share (EPS) rising by 123%.
What Is a Stock Dividend?
Less prevalent than cash dividends, stock dividends provide shareholders with additional shares of stock instead of cash.
What Is a Special Dividend?
A [special dividend] is an irregular payment to shareholders, often resulting from one-off instances such as windfalls or corporate actions. These are relatively rare but usually larger than standard dividends.
What Are Dividend Aristocrats?
A [dividend aristocrat] is a stock that has raised its dividend for at least 25 consecutive years—examples include AT&T, ExxonMobil, Caterpillar, 3M, and IBM, among others.
Related Terms: Stock Dividend, Special Dividend, Dividend Aristocrats.
References
- Nike. “NIKE, INC. DECLARES $0.305 QUARTERLY DIVIDEND”.
- Securities and Exchange Commission. “Form 10-K”.
