Companies experience cash dividend transactions in a variety of ways. Some pay dividends to stockholders as a return on equity for the stockholder's investment. The individuals who invest in these companies expect to receive dividends, and often choose these companies to receive a regular income. Other companies invest excess cash by purchasing shares of stock. These companies expect to increase their money by receiving dividend income. Cash dividends impact stockholder equity in both scenarios.
Stockholder equity refers to the value of company resources that belong to the shareholders. This includes money contributed from investors in exchange for shares in a company. It also includes money earned and retained for business purposes, also known as retained earnings. Creditors stake a claim on other company resources. These claims represent liabilities for the company. The total of the company's assets minus the total liabilities equal the value of stockholder equity.
Declared Cash Dividend
The company board of directors declares when to issue cash dividends. The directors meet periodically to evaluate the position of the company, and to determine whether to issue a dividend. If it agrees to issue a dividend, the meeting date becomes the date of declaration. When the board of directors declares a dividend, it reduces the balance of retained earnings. Retained earnings represent one component of stockholder equity, and when a company declares a dividend, it decreases its total shareholder equity.
Paid Cash Dividend
The board of directors also determines when the company must pay the dividend. On the date of payment, the company issues either an electronic payment or issues paper checks to the stockholders. This transaction makes no impact on the stockholder equity.
Cash Dividend Received
When a company invests in another corporation, it receives cash dividend payments as income. Dividend income increases the total revenues of the company and appears on the income statement, which calculates net income. The income received as dividends increases the net income for the company. At the end of the period, the company transfers the net income to the retained earnings account. An increase in retained earnings represents an increase in shareholder equity. When a company receives a cash dividend, it increases its total shareholder equity.
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