Cash Dividend

What is a Cash Dividend?

A cash dividend is a payment made by a corporation to its shareholders in the form of cash. This form of dividend distribution is one of the ways a company can return some of its profits to its shareholders. Unlike stock dividends, which distribute additional shares of the company, cash dividends provide a direct cash reward to investors, typically on a quarterly basis.

Cash dividends are paid net of income tax, meaning the tax is deducted before the dividend payment is made, and shareholders are credited for the taxes already paid. The amount paid per share is declared by the company’s board of directors on the dividend declaration date and distributed on the payment date.

Examples

Example 1: A Blue-Chip Company
An established blue-chip company announces a quarterly cash dividend of $0.50 per share. An investor owning 1000 shares would receive $500 in cash, minus any applicable taxes.
Example 2: A Small Cap Stock
A smaller company with more volatile earnings declares an annual cash dividend of $0.20 per share. If a shareholder owns 500 shares, they would receive $100 in cash before tax withholdings.

Frequently Asked Questions (FAQs)

Q1: How are cash dividends taxed?
A1: Cash dividends are typically subject to income tax. The company deducts tax at the source, and shareholders may receive a tax credit for the amount deducted. The exact tax treatment can vary based on jurisdiction and the shareholder’s individual tax situation.

Q2: What is the difference between a cash dividend and a stock dividend?
A2: A cash dividend involves payment in cash, while a stock dividend involves issuing additional shares to shareholders. Cash dividends provide immediate income, whereas stock dividends increase the number of shares an investor holds.

Q3: When do companies typically pay cash dividends?
A3: Companies often pay cash dividends on a regular schedule, such as quarterly or annually. The specific dates are determined by the company and announced ahead of time.

Q4: Can any company pay cash dividends?
A4: While any company can theoretically pay cash dividends, typically only profitable and financially stable companies with sufficient cash reserves do so.

Q5: How does receiving a cash dividend impact the value of an investor’s portfolio?
A5: Receiving a cash dividend adds cash to an investor’s portfolio, but the stock price of the company typically drops by approximately the amount of the dividend once it goes ex-dividend, keeping the total value of the investment relatively stable.

Q6: Is a higher cash dividend always better for shareholders?
A6: Not necessarily. While higher cash dividends can provide more immediate income, they may also indicate that a company has fewer growth opportunities to reinvest in.

Q7: How do I find out if a company pays cash dividends?
A7: Information about a company’s dividend payments, including cash dividends, can be found on their investor relations website, official financial statements, and leading financial news and data platforms.

Q8: What is the dividend declaration date?
A8: The dividend declaration date is when a company’s board of directors announces that a dividend will be paid. This is also when the dividend amount and the date of record are specified.

Dividend Yield: The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
Ex-Dividend Date: The date on which a stock starts trading without the value of its next dividend payment. Investors who purchase the stock on or after this date will not receive the next declared dividend.
Payable Date: The specific date when a declared dividend is paid to shareholders.

Online References

Investopedia: Cash Dividend
The Balance: What Is a Cash Dividend?
IRS: Publication 550 (2021), Investment Income and Expenses

Suggested Books for Further Studies

“The Little Book of Common Sense Investing” by John C. Bogle
“The Intelligent Investor” by Benjamin Graham
“One Up On Wall Street” by Peter Lynch
“Dividend Growth Machine: How to Supercharge Your Investment Returns with Dividend Stocks” by Nathan Winklepleck

Accounting Basics: “Cash Dividend” Fundamentals Quiz

### What is a cash dividend? - [ ] A dividend paid in additional shares. - [x] A dividend paid in cash. - [ ] A special one-time paid bonus. - [ ] A benefit given only to employees. > **Explanation:** A cash dividend is a payment made by a corporation to its shareholders in the form of cash rather than additional shares. ### How often are cash dividends usually paid? - [ ] Daily - [ ] Monthly - [x] Quarterly - [ ] Annually > **Explanation:** While they can be paid on various schedules, cash dividends are most commonly paid on a quarterly basis. ### Who decides the amount of a cash dividend? - [x] The Board of Directors - [ ] Shareholders in a referendum - [ ] Corporate employees - [ ] Financial analysts > **Explanation:** The Board of Directors of a company decides the amount of the cash dividend. ### What happens to the company's stock price on the ex-dividend date? - [x] It typically drops by about the amount of the dividend. - [ ] It increases by the amount of the dividend. - [ ] It stays the same. - [ ] It becomes highly volatile. > **Explanation:** On the ex-dividend date, the stock price typically drops by approximately the amount of the dividend as the payment now belongs to the seller, not the new buyer. ### Why might a company choose to pay a lower cash dividend? - [ ] To reduce attracting investor interest. - [x] To reinvest in its growth opportunities. - [ ] To qualify for tax reduction. - [ ] To maintain higher debt levels. > **Explanation:** Companies may choose to pay a lower cash dividend in order to reinvest more earnings back into growth opportunities and future expansions. ### How does a shareholder benefit from a cash dividend that is net of income tax? - [x] They receive credit for the tax deducted. - [ ] They avoid all taxation. - [ ] They gain extra shares. - [ ] They can reinvest tax-free. > **Explanation:** Shareholders benefit from a cash dividend net of income tax as they receive credit for the tax already deducted, simplifying their tax reporting. ### Which statement best describes the impact of a high cash dividend on future company growth? - [ ] It guarantees higher future profits. - [ ] It typically leads to lower capital reserves for growth. - [ ] It results in immediate stock price inflation. - [ ] It attracts short-term investors mostly. > **Explanation:** A high cash dividend can indicate that a company may have less retained profit for future growth investments, although it does provide immediate income to shareholders. ### What typically happens if an investor buys a stock right before the ex-dividend date? - [ ] They receive double the dividend. - [x] They are entitled to the upcoming dividend. - [ ] They lose the right to the dividend. - [ ] They incur additional costs. > **Explanation:** If an investor buys a stock right before the ex-dividend date, they are entitled to the upcoming dividend. ### How is a cash dividend payout announced? - [ ] Via a secretive internal memo. - [ ] Mandatory shareholder initiation only. - [x] Officially by the Board of Directors on the declaration date. - [ ] Not announced officially, just paid. > **Explanation:** The Board of Directors announces a cash dividend payout officially on the declaration date, providing shareholders with relevant details. ### What is NOT a common use of cash dividends? - [ ] Rewarding shareholders. - [ ] Signaling company profitability. - [ ] Enhancing stock price stability. - [x] Reducing company income taxes. > **Explanation:** Cash dividends are commonly used to reward shareholders and signal profitability, but they do not directly reduce company income taxes.

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