Cash dividend

Cash Dividend

A cash dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it is able to pay a proportion of this profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings). The decision to pay a cash dividend and the amount is made by the company's Board of Directors and it requires the shareholders' approval.

Overview

Cash dividends are a common way for companies to return capital to their shareholders. Typically, companies pay cash dividends on a regular basis (often quarterly), but they may also pay them as special dividends to distribute unusually large profits on an irregular basis.

Determining Cash Dividend Payments

The amount of a cash dividend is decided by the board of directors. Several factors influence this decision, including the company's profitability, its cash flow needs for operations and future expansion, and its dividend policy. The dividend payout ratio, which is the fraction of net income paid to shareholders in dividends, is a key indicator of how much money a company returns to shareholders versus how much it retains for reinvestment.

Types of Cash Dividends

There are two main types of cash dividends:

• Regular Dividends: These are paid out on a consistent schedule (e.g., monthly, quarterly, semi-annually, or annually) and the amount tends to remain relatively stable.
• Special Dividends: These are one-time payments made by a company to distribute extra earnings. They are not expected to recur in the future.

Taxation

In many jurisdictions, cash dividends are taxable income for the recipient. The tax treatment of dividends varies by country. In some cases, dividends are taxed at a lower rate than other types of income.

Impact on Share Price

The announcement of a cash dividend typically has a positive effect on a company's stock price, as it signals the company's health and profitability. However, on the ex-dividend date, the stock price usually drops by approximately the amount of the dividend to reflect the payout.

Record Date and Payment Date

To receive a dividend, a shareholder must be on the company's books on the record date. The payment date is when the company actually distributes the dividend, which is usually a few weeks after the record date.

Dividend Reinvestment Plans (DRIPs)

Some companies offer Dividend Reinvestment Plans, allowing shareholders to automatically reinvest their cash dividends in additional shares of the company's stock, often without paying a commission. This can be an effective way to accumulate more shares and thereby increase one's investment in the company over time.