Cash dividends represent the distribution of a company's profits to its shareholders. The payment schedule and payment rate is determined by the company's board of directors. Cash dividends reduce the shareholders' equity balance by a direct reduction to retained earnings -- a balance sheet equity account.
As a component of a company's shareholders' equity, or net worth, decreases in retained earnings simultaneously decrease stockholders' equity. The balance of retained earnings includes the net income a company has accumulated over its years of business, net of dividend payments. Cash dividends reduce both the company's retained earnings and stockholder's equity.
Stocks that Receive Dividends
Retained earnings and stockholders' equity are decreased by a per-share cash dividend that is paid on common and preferred shares of stock, and not on shares of repurchased or treasury stock. This means that when calculating dividend cash payouts, only outstanding shares of common and preferred stock should be considered.
From an accounting perspective, retained earnings and stockholders' equity is reduced on the dividend declaration date -- the date the dividends are announced by a corporation's board of directors. There is no decrease in retained earnings and shareholder's equity on the date the dividends are paid, which usually is several weeks after the declaration date.
To illustrate how cash dividends decrease retained earnings and total stockholders' equity, assume a company has 20,000 common shares authorized with 5,600 outstanding, and repurchased shares of common stock in the amount of 2,478. The corporation announces a dividend of 52 cents per share on July 6.
On July 6, the total amount of dividends payable to the shareholders is $2,912, the result of the 5,600 outstanding shares multiplied by the dividend rate of 52 cents per share. Retained earnings will be reduced by the $2,912 on this date. The 2,478 treasury shares are excluded from the calculation.
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