When an individual owns shares of a stock, the person may or may not receive dividends from the company when the stock gains in value. Whether or not dividends are distributed to stockholders depends entirely upon the company's stock plan. These dividends offer immediate profit to the stockholders, but not to the company.
Equity in a Stock
The amount of equity in a company's stock is equal to the company's net worth. Companies figure this number by deducting the expenses and money owed from the total assets. If a company has $200,000 in assets, for instance, and the company owes creditors $40,000, the company's net worth, or stockholders' equity, equals $160,000. This is the amount of money available at any given moment for the company as working capital to fund additional ventures and projects.
What Are Dividends?
When a company sells stock, it receives upfront money from investors, which can then be used for payroll, projects or other company expenses. If the company uses the stock money to invest in a project and that project becomes successful, the company profits, which increases the net worth of the company and the value of the stock. Some companies put this money right back into the working capital and simply allow the net worth and stock prices to rise. Other companies distribute those profits, or a portion of the profits, to those who own shares of stock.
Do Dividends Decrease Stockholders Equity?
Profits raise stockholders' equity in a company as long as they remain a company resource. Dividends, however, remove the profits from the company resource pool. Even though the payments are made to those individuals who own stock in the company, dividends still count as an expense against a company's profits. As an expense, dividends take money away from the company, lowering the net worth and decreasing stockholders' equity.
Dividends vs Stockholders Equity
When it comes to investing in stock, one thing to consider is whether you want to profit from the stock presently or whether you want any earned money from the stock to build over a longer period of time and pay off at a later date. If you invest in a stock that pays dividends, you may receive money every quarter from that stock. If you invest in a stock that doesn't pay dividends, you won't receive money until you sell the stock, but when it comes time to sell, the stock may be worth more than if dividends had been paid out.