What Is a Cash Dividend?
Let me explain what a cash dividend really is. It's the money a company pays out to its stockholders, usually from its current earnings or accumulated profits. Unlike stock dividends, which give you more shares, cash dividends put actual money in your pocket. As an investor, you often get the choice through your broker to take the cash or reinvest it back into more shares.
How a Cash Dividend Works
Here's how cash dividends operate in practice. Companies distribute them as periodic cash payments to return capital to shareholders, most often quarterly, though some do it monthly, annually, or semiannually. You might also see special one-time cash dividends after events like legal settlements or large borrowings. Each company sets its own dividend policy and reviews it regularly, deciding on cuts or increases based on performance. These payments are made per share, so the more shares you own, the more you get.
The Timing of Cash Dividends
Pay attention to the timing if you're investing. The board of directors declares the dividend on a specific date, stating the amount per share. Then comes the record date, when the company identifies eligible shareholders. Stock exchanges set the ex-dividend date, usually two business days before the record date—if you buy shares before this, you're entitled to the dividend. Remember, these earnings are taxable income, and you'll get a Form 1099-DIV to report them.
Which Companies Pay Dividends?
Not every company pays dividends, and I'll tell you why. Typically, it's firms with stable cash flows that are past their high-growth phase. Growth companies reinvest profits to expand, like building factories or hiring staff, so they skip dividends. Mature companies might even target a payout percentage of profits, such as banks do. If profits drop, they can adjust or suspend the policy to weather tough times.
Accounting for Cash Dividends
From an accounting standpoint, when a company declares a dividend, it debits retained earnings and credits a dividend payable liability. On payment day, it reverses that liability and debits cash for the outflow. This doesn't touch the income statement, but it reduces shareholders' equity and cash by the same amount. You'll see these in the financing section of the cash flow statement. To compare across companies, look at the trailing 12-month dividend yield: dividends per share divided by current stock price.
Cash Dividend Example
Take Nike as a real-world example. In February 2022, they announced a quarterly cash dividend of $0.305 per share, payable on April 1, 2022. For fiscal year 2021, their revenues grew 19.3% year-over-year, and earnings per share jumped 123%. This shows how a mature company with strong performance rewards shareholders through consistent cash dividends.
Frequently Asked Questions
You might have some questions, so let's address a few. A stock dividend pays in additional shares, not cash—it's less common. A special dividend is an irregular payout, often from one-off events like windfalls, and it's usually larger than regular ones. Dividend aristocrats are companies that have increased dividends for at least 25 straight years, like AT&T or ExxonMobil. These distinctions matter when evaluating your investment strategy.
Key Takeaways
- Cash dividends are periodic cash payments to shareholders from company earnings.
- They're common in mature companies with stable cash flows.
- Timing involves declaration, record, and ex-dividend dates.
- They reduce retained earnings and cash but not income.
- Dividend reinvestment plans (DRIPs) let you automatically buy more shares.
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