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.
