Are Dividends Considered a Company Expense?
Cash or stock dividends that are distributed to shareholders aren’t recorded as an expense on a company’s income statement. Cash and stock dividends don’t affect a company’s net income or profit. Dividends impact the shareholders’ equity section of the balance sheet. Dividends represent a reward to investors for their investment in the company whether they’re cash or stock.
Cash dividends reduce the overall shareholders’ equity balance. Stock dividends represent a reallocation of part of a company’s retained earnings to the common stock and additional paid-in capital accounts.
Key Takeaways
- Cash dividends are cash outflows to a company’s shareholders.
- Cash dividends are recorded as a reduction in the cash and retained earnings accounts.
- Stock dividends reallocate part of a company’s retained earnings to its common stock and additional paid-in capital accounts.
- Cash or stock dividends that are distributed to shareholders aren’t recorded as an expense on a company’s income statement.
Why Dividends Aren’t Expenses
A cash dividend is a sum of money paid by a company to a shareholder out of its profits or reserves which are called retained earnings. Companies retain or accumulate their profits in retained earnings each quarter.
Retained earnings are essentially a savings account. They’re located on the balance sheet in the shareholders’ equity section. The cash within retained earnings can be used for investing in the company, to repurchase shares of stock, or to pay dividends.
The cost of dividends isn’t included in the company’s income statement because they’re not an operating expense: the costs to run the day-to-day business. A company’s dividend policy can be reversed at any time and this won’t show up on its financial statements, either.
Cash Dividends Accounting
Cash dividends aren’t a company’s expense so they show up as a reduction in the company’s statement of changes in shareholders’ equity. Cash dividends reduce the size of a company’s balance sheet and its value because the company no longer retains part of its liquid assets.
Cash dividends impact a company’s cash flow statement, however. Cash flow refers to inflows or increases as well as outflows or reductions in cash. Cash dividends impact the financing activities section of the cash flow statement by showing a reduction in cash for the period. They reduce a company’s cash position even though cash dividends aren’t an expense.
Stock Dividends Accounting
A stock dividend is an award to shareholders of additional shares rather than cash. Stock dividends don’t represent a cash flow transaction and they aren’t considered an expense, either.
Companies distribute stock dividends to their shareholders in a certain proportion to their common shares outstanding. Stock dividends reallocate part of a company’s retained earnings to its common stock and additional paid-in capital accounts.
Important
Stock dividends affect the overall size of a company’s balance sheet.
How Dividends Are Paid
Dividends generally are announced or “declared” by a company whether they’re paid in cash or stock. They’re then paid out every quarter at a specified date. Investors are paid in proportion to their holdings. A company might pay a dividend of .25 cents per share payable 60 days from the date of the announcement.
A company’s history of dividends is an important factor in many investors’ decision-making processes. Dividends tend to be most prized by relatively conservative investors who buy stocks for the long term and by those who value the regular income they provide. Dividend-yielding stocks are a component of most portfolios that are recommended by professional financial advisers.
There’s never a guarantee that a dividend will be paid every year. Some companies have earned boasting rights for their history of dividend payments, however. Coca-Cola notes on its website that it has paid a quarterly dividend since 1955 and that its annual dividend has increased in each of 58 years.
What Are Retained Earnings?
Retained earnings are the portion of profits that remain after dividends to shareholders have been distributed and paid. They can benefit the business when they’re used to pay off company debts or invest in growth.
What’s the Difference Between Cash Dividends and Dividend Payments?
Cash dividends represent a company’s outflow that goes to its shareholders and increases the shareholders’ net worth. Dividend payment is recorded through a reduction in the company’s cash and retained earnings accounts as a liability.
Do Stock Dividends Dilute Shares?
A stock dividend dilutes share price because it creates a larger number of outstanding shares. Each share represents a percentage of the company’s profits. Any total that’s divided by an increased number results in those shares being worth less.
The Bottom Line
A stock dividend is an award to shareholders of additional shares. It’s transferred instead of cash. Cash dividends reduce the company’s value because it no longer retains part of its liquid assets.
Both can impact operations but they’re necessary to the company’s sustainability and growth. Neither is recorded as an expense on a company’s income statement. Which is right for you as an investor may be much different from that which most benefits the company.