What Is a Cash Dividend?
A cash dividend is the distribution of funds or money paid to stockholdersgenerally as part of the corporation's current earnings or accumulated profits.
Cash dividends are paid directly in money, as opposed to being paid as a stock dividend or other form of value. Most brokers offer a choice to reinvest or acceptcash dividends.
Key Takeaways
- A cash dividend is a payment made by a company to its stockholders in the form of periodic distributions of cash (as opposed to in stock or any other form)
- 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 acceptor reinvest cash dividends.
- Dividend-paying companies are typically established, with stable cash flow, and beyond the growth stage.
- Dividend reinvestment plans (DRIPs) are increasingly common among companies and brokers.
How a Cash Dividend Works
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 eventssuch as legal settlements or the borrowing of money forlarge, 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.
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 earnings, and they are taxable as income forthe 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 thegrowth 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, the dividend policy can be amended or postponed tobetter 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 inthe financing activity section of their cash flow statement.
The easiest way to compare cash dividends across companies is to look at the trailing 12-month (TTM) 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 rather mature firm that pays quarterly cash dividends. In February 2022, the sportswear brand announced a $0.305 per share quarterly cash dividend payable Apr. 1, 2022. For fiscal year 2021, the company saw year-over-year (YOY) increased revenues of 19.3%. Meanwhile, earnings per share (EPS) rose 123%.
What Is a Stock Dividend?
Less common than cash dividends, stock dividends instead pay shareholders with additional shares of stock.
What Is a Special Dividend?
A special dividend is paid to shareholders outside of the regular dividend schedule. It may result from a windfall earnings, spin-off, or other corporate action that is seen as a one-off. In general, special dividends are rare but larger than ordinary dividends.
What Are Dividend Aristocrats?
A dividend aristocrat is a stock that increases its dividend for at least 25 consecutive years. Examples include AT&T, ExxonMobil, Caterpillar, 3M, and IBM, among others.
FAQs
A cash dividend is a payment made by a company to its shareholders in the form of cash, usually from the company's profits. On the other hand, a stock dividend involves distributing additional shares of the company's stock to existing shareholders instead of cash.
What is the difference between stock dividend and cash dividend? ›
Companies that pay stock dividends are giving their shareholders the choice of keeping their profit or turning it to cash whenever they so desire; with a cash dividend, no other option is given.
What is an example of a cash dividend? ›
Cash Dividend Example
This company has decided to give out cash dividends to its shareholders because it had a profitable year. You own 200 shares of ABC Widgets. The company announces a cash dividend of 25 cents per share. This means that for every share you own, you'll receive 25 cents as a dividend.
What is an example of a stock dividend? ›
For example, if you own 10,000 shares of common stock in a corporation and it issues a 15% stock dividend, you will receive an additional 1,500 shares (15% x 10,000 = 1,500). Most stock dividends are given to common stockholders.
What is the difference between stock and dividends? ›
Dividend stocks are shares of companies that pay regular dividends to their shareholders. Dividends are payments made by companies to their shareholders as a portion of their profits. The amount of the dividend paid to each shareholder is typically determined by the company's board of directors.
Why do companies declare stock dividend instead of cash dividend? ›
Dividends, whether in cash or in stock, are the shareholders' cut of the company's profit. They also are a reward for holding the stock rather than selling it. A company may issue a stock dividend rather than cash if it doesn't want to deplete its cash reserves.
Why might investors prefer cash dividends over stock dividends? ›
While cash dividends result in immediate cash payments to shareholders, stock dividends increase the number of shares that investors in a company or fund own. Cash dividends may be preferred among income investors, but will require taxes to be paid.
How do cash dividends work? ›
Cash dividends are declared by a corporation's Board of Directors, and are paid to shareholders on a per share basis. Companies usually pay dividends on a fixed schedule, such as quarterly, semi-annually, or yearly.
How to determine cash dividend? ›
For common stock dividends, take the number of shares outstanding and multiply it by the per-share dividend for each quarter. Add the four quarterly figures up and you'll have total cash dividends paid for the year.
Does a cash dividend reduce share prices? ›
Cash dividends occur when companies pay shareholders a portion of their earnings in cash. When this happens, the company's share price drops by roughly the same amount as the dividend amount, since the economic value is simply transferring from the company to shareholders instead of being reinvested in the company.
If the 100% stock dividend is for the exactly the same stock, it is basically the same as a 2-for-1 stock split. If, however, the 100% stock dividend is to give you a different stock, then this is typically due to a corporate reorganization or demerger/spinoff event.
Is a stock dividend good? ›
A dividend is typically a cash payout for investors made quarterly but sometimes annually. Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.
What is a stock dividend also known as? ›
What is a stock dividend? It's a dividend payment that a company gives to its existing stakeholders from the profit or earnings it made during a financial year which is paid in additional shares rather than cash. They're also called scrip dividends or bonus shares.
What is the difference between a cash dividend and a stock dividend? ›
A cash dividend is a payment made by a company to its shareholders in the form of cash, usually from the company's profits. On the other hand, a stock dividend involves distributing additional shares of the company's stock to existing shareholders instead of cash.
Why is cash dividend better? ›
A cash dividend is a financial distribution made by a company to its shareholders, representing a portion of its profits and free cash flow. Unlike stock dividends, which involve issuing more shares, cash dividends provide shareholders with immediate monetary benefits.
What is the difference between cash and stock? ›
The main distinction between cash and stock transactions is this: In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded in the acquisition premium will not materialize. In stock transactions, that risk is shared with selling shareholders.
Do you pay taxes on stock dividends? ›
Yes, the IRS taxes dividend income -- but not always; it depends on a few circ*mstances. Let's look at some exceptions. A common exception is dividends paid on stocks held in a retirement account such as a Roth IRA, traditional IRA, or 401(k).
How is stock dividend and cash dividend calculated? ›
The companies use a very simple way to calculate the dividend they wish to pay to the shareholders in the form of cash. It is as follows: Cash dividend = Dividend per share x No of shares held by the shareholder. The organizations declare the dividends which are on a per share basis.
Why would a company pay cash dividends? ›
Why do companies pay dividends? Paying dividends allows companies to share their profits with shareholders, which helps to thank shareholders for their ongoing support via higher returns and to incentivise them to continue holding the stocks.
What is the difference between stock dividend and dividend yield? ›
While the dividend rate shows the absolute amount of dividend paid per share, the dividend yield factors in the stock's current price, offering a more insightful measure of the return on investment.
