When a publicly traded company accumulates profits, it has the choice of allocating its earnings with its shareholders through payments of cash dividends.
Cash dividends offer stockholders the privilege of owning a corporation’s distributed profits. It also provides an incentive to investors to hold shares of big businesses.
Moreover, long-term investors who are interested in maximizing their gains should think about reinvesting their dividends, as most brokers offer the option of reinvesting or taking cash dividends.
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How does it work?
Companies that pay cash dividends usually produce strong cash flows for next quarters. It is also a common means of returning capital to stockholders in the form of cash payments each quarter.
As regards common stock, cash dividends are typically stated in dollars per share. When discussing preferred stock, they are reported in percentage of the par value of the stock.
For example, a shareholder owns 3,500 shares of a company. Its board of directors then determines a dividend of $2.66 per share for a particular quarter. Based on this, the shareholder will likely receive 3,500 x $2.66=$9,310.
Cash dividends do not affect the company’s income statement. They do however, reduce shareholders’ equity and cash balance by the same amount.
Cash Dividends vs Stock Dividends
Cash dividends are basically the payment made by the company in cash to its shareholders. Stock dividends on the other hand, are the payment made in the form of additional shares by a corporation.
Stock dividends are given to shareholders to pay them without hurting the company’s own cash position.
Stock dividends also do not have tax charges that should be paid until the position is sold. Shareholders can either hold on to the shares, or sell them if they want to cash out.
They can add more shares through cash dividends, but it would need some administrative work from stockholders. Hence, some businesses do not take advantage of buying more shares with cash dividend.
Companies that issue cash dividend do so, since they already have continuous earnings from operations. Cash dividend, leaves the decision entirely to investors. They can use the money to pay expenses, or buy more shares of the company or another corporation.
Stock dividends are believed to be superior to cash dividends, since they do not come with a cash option. However, choosing stock dividends is not always the better option, given the volatile nature of the stock market.
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Why do corporations pay dividends?
Corporations are not required to pay dividends. Those who chose to do so usually have grown enough and see no investment opportunities in themselves to expand further.
That is why, rather than holding on to the money, companies decide to share it to the stockholders. Distributing the earnings would help raise shareholder value and create a steady flow of income for their shareholders.
Paying cash dividends also offers companies growth into new markets and new investment opportunities.
Some businesses set their dividend payout ratio within the range of 50 to 55 percent. They then distribute the amount of maintained to their stockholders as dividend.
Moreover, paying cash dividends provide continuous income, regardless of market performance. As long as the company continues to pay its dividend, they’ll keep earning as well.
Cash dividend-paying companies must also guarantee that their financial position is strong enough to support it.
Companies that pay dividends, include Apple Inc., Microsoft Corporation, ExxonMobil Corp., Wells Fargo & Co., and Verizon Wireless.
What can shareholders get from it?
Investors owning stock in a cash dividend-paying company receive a number of benefits, such as a steady source of income.
Shareholders who want liquidity may hold on to shares longer and rely on cash dividends instead, while waiting for stock prices to rise. If a share loses value, cash dividends could lessen the impact of the loss.
The catch however, would be the tax implications for shareholders, who must declare the dividend as an investment income.
Given that cash dividends occur regularly, tax implications has been a continuous burden for stockholders, instead of letting investors decide when to pay taxes by selling the share at a profitable time.
The tax on cash dividends also lessens the value of the payment and affects dividends whether the stock increases value or not.
Cash Dividends Dates to Remember
Generally there are four important dates to know when a company’s board announces a dividend. These dates are vital as they determine when exactly the shares can be owned.
The board of directors typically announces the dates in advance. This will give investors some time to decide if they want to receive the dividend payment or not.
This is when the firm’s board of directors declares a cash dividend. It involves paying the dividend per common share. The board will decide the amount of the dividend, and when it should be paid to shareholders.
Once that is done, a record date is determined. This is the date on which the firm assesses its books to confirm its stockholders on record. Shareholders who have a certain stock on this date will be given the company’s dividend payment.
Share transfer books will be closed and a list all stockholders entitled to receive a dividend is prepared at this date. The company will also have records of the number of eligible shares and the overall amount of dividends to be paid.
The cash representing dividends is given to shareholders in the form a list prepared on the record date.
Stock exchanges or other specific securities organizations decide this date. Ex-dividend dates are usually determined two business days before the record date.
An investor who acquired the common stock before the ex-dividend date is entitled to the dividend, but if he made the purchase after, then he will not eligible to receive the dividend.
This is when the dividend payment is expected to be received.
Knowing Cash Dividends Paid
Determining the amount of dividends paid by a company can help monitor the cash flow.
Knowing how much money the firm pulls out to meet its dividend requirements is vital, as it can validate if the business can maintain the payments even if its profits momentarily fall.
It could also tell about the company’s way of using its available capital. Confirming that the business is not excessively using its extra money in dividends will show how secure its dividend in case something happens to its ability to earn income.
Here are some ways to find out the cash dividends paid.
Do the Math
It will involve assessing the company’s quarterly dividend distributions, then making the calculations necessary to determine the total cash obligation.
Corporations typically declare the amount they paid to common shareholders per quarter. If a firm issues preferred stock, dividends will be disclosed to the public.
Add the overall amount of preferred stock dividends paid with the total common stock dividends paid to find the total cash dividends paid.
For example, if the company’s preferred stock dividends paid is $120,000 and its common stock dividends paid is $150,000, then it paid a total of $270,000 in cash dividends.
The overall preferred or common stock dividends paid can be determined by multiplying their stock dividends per share by their shares outstanding.
Some companies provide the overall cash dividends paid through their financial statements. Several cash flow reports will consist of dividend payments as a financing-related cash flow.
For that reason, figuring out the cash dividends paid will be trivial, since the company has written down the exact amount directly on the cash flow statement.
Examining income statements and balance sheets are some more indirect means of knowing the cash dividends paid. They can help determine how much of the company’s net income is reflected on retained earnings.
If retained earnings edged higher by less than the net profit, and the firm does not have other capital financing transaction, the difference will be usually because of dividends.
The downside though, is that it gets more complicated than other methods. Nonetheless, it can still be used as a cross-check against alternative ways to compute dividends paid.
Cash dividends are the payment made by the company from its profits to its shareholders as return on their investment. It indicates the corporation’s strength, and that the management is confident with the business’ future earnings, which would make the share more attractive.
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