What is a cash dividend?
A cash dividend is a company’s direct payment of money to its shareholders, typically drawn from current earnings or accumulated profits. It is paid per share (for example, $0.30 per common share) and is one of the principal methods firms use to return capital to owners. Cash dividends differ from stock dividends (additional shares) and from one‑time special dividends, which are irregular and usually larger.
Key features — quick overview
– Paid in cash on a per‑share basis.
– Often distributed on a regular schedule (quarterly is common), but some firms use monthly, semiannual, or annual payouts.
– Declared by the board of directors and subject to corporate policy and available cash.
– Taxable to recipients and reported to investors on Form 1099‑DIV (U.S.).
– Reduce the company’s cash and shareholders’ equity but do not affect net income.
How a cash dividend works — timeline and mechanics
1. Declaration date: The board announces the dividend amount per share and sets the record and payment dates. The company records a dividend payable (liability) and reduces retained earnings.
2. Record date: The date the company uses to determine which shareholders are eligible. Only owners on the company’s shareholder register at that date receive the dividend.
3. Ex‑dividend date: Typically two business days before the record date (per common U.S. market practice). To receive the dividend, you must buy the stock before the ex‑dividend date; purchases on or after the ex‑dividend date do not qualify.
4. Payment date: The day cash is transferred to eligible shareholders and the dividend payable liability is reversed.
Accounting entries (simplified)
– On declaration: Debit Retained Earnings; Credit Dividends Payable (liability).
– On payment: Debit Dividends Payable; Credit Cash.
Effect on financial statements
– Income statement: no effect (dividends are distributions of profit, not an expense).
– Balance sheet: cash decreases and shareholders’ equity (retained earnings) decreases by the same amount.
– Cash flow statement: dividend payments are reported in the financing activities section.
Who pays dividends and why
Companies that pay regular cash dividends are usually mature with relatively stable cash flows and fewer high‑return investment needs. Firms still in aggressive growth phases often retain earnings to reinvest instead of paying dividends. Some companies set a payout target (for instance, distributing a fixed percentage of annual profits) and adjust payouts if earnings change.
Special and stock dividends
– Stock dividend: paid in additional shares rather than cash—shares are distributed pro rata to existing shareholders.
– Special dividend: a nonrecurring cash distribution, often following an unusual event (asset sale, windfall, legal settlement, or corporate restructuring). These are usually larger than regular dividends and not part of the ongoing dividend schedule.
Dividend Aristocrats
A “dividend aristocrat” is a company that has raised its cash dividend for at least 25 consecutive years. These firms are often cited for dividend consistency (examples commonly listed include large, long‑established companies).
Worked numeric examples
1) Timeline example (dates simplified)
– Board declares dividend on March 1 ($0.40 per share), with record date March 22 and payment April 1.
– Ex‑dividend date is usually two business days before record date → ex‑dividend = March 20.
– To receive the $0.40, you must own the shares before March 20. If you buy on March 21, you will not be on the register on March 22 and will not receive the payment.
2) Total cash obligation and accounting entries
– Company A has 2,000,000 outstanding common shares and declares a $0.50 per share dividend. Total cash required = 2,000,000 × $0.50 = $1,000,000.
– On declaration: Debit Retained Earnings $1,000,000; Credit Dividends Payable $1,000,000.
– On payment: Debit Dividends Payable $1,000,000; Credit Cash $1,000,000.
3) Trailing 12‑month (TTM) dividend yield
– A firm pays $0.30 per share each quarter. Annual dividend = 4 × $0.30 = $1.20.
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– Dividend yield (formula and example)
– Dividend yield = Annual dividend per share ÷ Current share price.
– Example (continuing): Annual dividend = $1.20. If the share price is $20.00, dividend yield = $1.20 ÷ $20.00 = 0.06 = 6.0%.
– Trailing 12‑month (TTM) yield vs. forward (annualized) yield
– TTM dividend yield uses the sum of dividends actually paid over the last 12 months. Use it when dividends vary from quarter to quarter.
– Forward (annualized) yield uses the most recent declared dividend annualized (e.g., latest quarterly dividend × 4) divided by current price; it reflects the company’s most recent dividend policy but is a projection, not a guarantee.
– Example (variable dividends): Last four quarterly dividends: $0.25, $0.30, $0.35, $0.40 → TTM dividend = $1.30. If price = $25.00, TTM yield = $1.30 ÷ $25.00 = 0.052 = 5.2%. If the company just declared a new quarterly dividend of $0.45, forward annualized dividend = $0.45 × 4 = $1.80 and forward yield = $1.80 ÷ $25.00 = 7.2%.
– Worked checklist: how to compute cash dividend metrics
1. Confirm the per‑share dividend(s) paid over the last 12 months (or the most recent declared quarterly dividend if you want forward yield).
2. Sum the last four dividends to get TTM dividend per share (or annualize the latest declaration).
3. Obtain the current market price per share (use the most recent trade or bid/ask midpoint depending on purpose).
4. Compute yield = (annual dividend per share) ÷ (current price per share).
5. If assessing company cash obligation, multiply per‑share dividend by total outstanding shares.
6. Adjust for recent corporate actions (stock splits, spin‑offs) that change shares outstanding or per‑share figures.
– Payout ratio (brief)
– Payout ratio = Dividends per share ÷ Earnings per share (EPS). It shows what fraction of earnings is paid out.
– Example: If annual dividend = $1.20 and EPS = $3.00 → payout ratio = $1.20 ÷ $3.00 = 40%.
– Practical caveats and assumptions
– Dividends are declared by the board and can be changed or suspended; yields change with price movements.
– TTM yield measures historical cash returns; forward yield measures the current policy but is prospective.
– Stock splits change per‑share amounts but not the company’s total cash obligation (unless dividend policy changes).
– Taxes: dividend taxation depends on whether dividends are “qualified” or ordinary and on your jurisdiction; consult tax guidance.
– Accounting classification: declaration reduces retained earnings and creates a liability until payment; dividend payments reduce cash and the payable. For cash flow reporting, dividends paid are typically a financing outflow under US GAAP.
– Quick numeric summary (two-line reference)
– Formula: Dividend yield = Annual dividend per share ÷ Current share price.
– Example values: Annual dividend $1.20; price $20.00 → yield 6.0%. TTM sum $1.30; price $25.00 → TTM yield 5.2%.
Educational disclaimer: This information is educational and not individualized investment advice. Dividend policies can change; always verify current company announcements and consult a qualified advisor for personal decisions.
Sources
– Investopedia — Cash Dividend: https://www.investopedia.com/terms/c/cashdividend.asp
– U.S. Securities and Exchange Commission (SEC) — Dividend Basics: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_dividends
– Internal Revenue Service (IRS) — Topic No. 404 Dividends: https://www.irs.gov/taxtopics/tc404
– Nasdaq — Ex‑Dividend Date and Record Date: https://www.nasdaq.com/articles/what-is-an-ex-dividend-date