Types of Dividends
Dividends are distributions of company earnings to the shareholders. They can be in the form of cash, stock, or property. Most unrelated investors (not directly involved with the day-to-day operations of the business) probably prefer to receive cash dividends. After all, who doesn’t like cash? However, stock dividends can be quite profitable in the long run when investors finally get around to selling the shares they receive as stock dividends.
Dividends are not an expense of doing business. They’re a balance sheet transaction only, serving to reduce both cash (in the case of cash dividends) and retained earnings.
Cash dividends
Shareholders of record receive payment in the form of cash or electronic transfer based on how many shares of stock they own. However, to pay cash dividends, a company must meet two conditions: It can’t pay cash dividends unless there are positive retained earnings, and it must have enough ready cash to pay the dividends.
For example, imagine that you own 2,000 shares of common stock in ABC Corporation. ABC has both a surplus of cash and positive retained earnings, so the board of directors decides to pay a cash dividend of $10 per share. Your dividend is $20,000 (2,000 shares x $10).
Property dividends
In this case, the corporation issues a dividend for one of the assets of the corporation. It could be any asset: inventory, equipment, vehicle, whatever.
When a company issues a property dividend, it has to restate the value of the distributed asset at fair value.
Stock dividends
Corporations normally issue stock dividends when they’re low in operating cash but still want to throw the investors a bone to keep them happy. Although no money immediately changes hands, issuing stock dividends operates the same as cash dividends: Each shareholder of record gets a certain number of extra shares of stock based on how many shares that shareholder already owns.
This type of dividend is expressed as a percentage rather than a dollar amount. For example, if a company issues a stock dividend of 5 percent, and the investor owns 1,500 shares, that investor receives an additional 75 shares of stock (1,500 x .05).
One other type of stock transaction that doesn’t reduce retained earnings is a stock split. A stock split increases the number of shares outstanding by issuing more shares to current stockholders proportionately by the amount they already own. Stock splits are typically done when a company feels the trading price of its stock is too high because this artificially reduces the price per share.
Time for an example of a stock split. Imagine that ABC Corporation stock is trading for $100, and the company feels this high price affects the average investor’s desire to purchase the stock. To get the price of the stock down to $25 per share, the company issues a four-for-one split. Every outstanding share now is equal to four shares.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
