Dividends are a reward to the shareholders of the company in exchange for their initial investment in a company’s equity and most of the time it comes out of the net profits. A company’s major profits are referred to as retained earnings which are kept safe to fund ongoing business activities and the rest are given to shareholders as dividends.
A dividend is most commonly paid in cash to the stock owners of a company. However, sometimes they come in other forms that do not include cash payment. The different types of dividends are the following:
Company XYZ declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $10, and its par value is $2.
| DEBIT | CREDIT |
Retained earnings | 100,000 |
|
Common stock, $2 par value |
| 20,000 |
Additional paid-in capital |
| 80,000 |
On Feb 1, the board of directors declares a cash dividend of $1 per share on the company’s 2,000,000 outstanding shares, to be paid on June 1 to all shareholders of record on April 1.
| DEBIT | CREDIT |
Retained earnings | 2,000,000 |
|
Dividends payable |
| 2,000,000 |
On June 1 the company pays the dividends and reports this entry
| DEBIT | CREDIT |
Dividends payable | 2,000,000 |
|
Cash |
| 2,000,000 |
If a company struggles financially might choose to not pay dividends in order to save the company from additional expenses that it cannot fulfill. In some cases, the company might choose not to pay them to reinvest in the company’s growth but this does not mean the company is not profitable. Furthermore, when the company exceeds the normal expenses because of an unexpected event the same can happen. Investors who wish to have a dividend-paying portfolio will seek companies that are big enough and do not suffer from unstable profits, growth, or unexpected expenses.
On the other hand, if a company pays and all of a sudden suspends them, it indicates a bad signal. It might be better to sell your shares and seek investment elsewhere.
Shareholders who own preferred stocks have a higher claim on a company’s assets than common shareholders but a lower claim than bondholders. For instance, when a company decides to cut on dividends there is a specific order this will happen. It will start from the bottom of the hierarchy and go upwards. The first to get paid are bondholders, then preferred shareholders, and last common shareholders.
Special dividends are a one-time dividend that is given to the shareholders as a bonus. This bonus can mean a good revenue quarter or a change in the financial structure and they are often larger than the standard ones.
In general, they are not guaranteed. This is because they are at the discretion of the board of directions and can differ from prior dividend payments. The reason can be an increase or a decrease in the company’s profits, or the need for reinvestment in the company especially when producing a new product or service and wishes to expand.
Companies pay them to attract more investors in order to drive the share price up. A mature company that has already grown and is not in need of reinvestment capital will offer them to attract investors and show a healthy and steady accomplished business. For some investors companies that pay dividends are more trustworthy and give the feeling of a more safe investment.
Regarding cash dividends to investors, they are calculated on a per-share basis. For instance, if a company pays $1 per share to an investor that owns 100 shares, he would receive $100.
Stock dividends are a percentage increase of an investor’s owned shares. If an investor owns 100 shares and the company issues a 10% stock dividend the investor will end up having 110 shares.
Dividends are paid at a scheduled frequent time and can vary from monthly, quarterly, or annually. For example, Walmart (WMT), Unilever (UL), Apple (AAPL), Wells Fargo (WFC), JPMorgan (JPM), and Microsoft (MSFT) make regular quarterly dividend payments.
On the other hand, Amazon (AMZ), Facebook (FB), or Alphabet (GOOGL) have never paid dividends up to now.
Declaration date – This is the date when the dividend is declared.
Record date – At the time of declaration, the record date is set. This means that all shareholders on record up to that date will receive a dividend payment.
Ex-date or ex-dividend – The day following the record date is called the ex-date. The ex-dividend is when a stock begins trading so investors that entered at the ex-dividend date are not entitled to the most recent dividend payment.
Payment date – The payment date is usually about one month after the record date.
Young companies or startups do not pay dividends for the simple reason of wanting to expand their business growth at the desired levels. Some investors prefer these companies because dividends are taxed at ordinary income rates. When a young company reinvests its capital and grows, investors benefit from the share price going up without being taxed on the increase of the share price.
The exception is a dividend payment in an individual retirement account (tax-advantaged) when the money grows tax-free until the time of the withdrawal.
Dividends are the last thing to be covered in a company’s expense. The company is paying the operating expenses first, then the reinvestment expenses if any. This is why well-established companies are more likely to pay dividends since they don’t need a large amount of capital for reinvestment and has a more stable dividend payout.
Declaration date – This is the date when the dividend is declared.
Record date – At the time of declaration, the record date is set. This means that all shareholders on record up to that date will receive a dividend payment.
Ex-date or ex-dividend – The day following the record date is called the ex-date. The ex-dividend is when a stock begins trading so investors that entered at the ex-dividend date are not entitled to the most recent dividend payment.
Payment date – The payment date is usually about one month after the record date.
Young companies or startups do not pay dividends for the simple reason of wanting to expand their business growth at the desired levels. Some investors prefer these companies because dividends are taxed at ordinary income rates. When a young company reinvests its capital and grows, investors benefit from the share price going up without being taxed on the increase of the share price.
The exception is a dividend payment in an individual retirement account (tax-advantaged) when the money grows tax-free until the time of the withdrawal.
Dividends are the last thing to be covered in a company’s expense. The company is paying the operating expenses first, then the reinvestment expenses if any. This is why well-established companies are more likely to pay dividends since they don’t need a large amount of capital for reinvestment and has a more stable dividend payout.
These are some of the stocks that pay monthly dividends but there are much more out there. If you wish to receive emails regarding stocks you can subscribe here.
*On the date of declaration: The declaration date is the date which the board of directions of a company authorizes the payment of a dividend to its shareholders.
**Fair value: Fair value is the price that two parties are willing to pay for an asset or liability, preferably in an active market. In this situation, the effects of supply and demand will likely impact the value associated with the asset under examination.
***Book value: Are the asset’s original cost minus any accumulated depreciation and impairment changes. The book values are compared to the market values for financial analysis and are simply an accounting calculation.
