Stocks that deliver dividends are a good investment if you want something to bring in income in the short-term. By issuing dividends, a corporation shares its earnings with stockholders, so you see a gain even before you sell the stock. Generally Accepted Accounting Principles detail the standards for how companies report their dividends in financial statements.
Corporations can issue dividends as cash, added stock or sometimes distribute assets as property dividends. To pay cash or stock dividends, the company must have either enough money available for a cash payout, or have enough authorized stock to issue more. If some of the company shares are "preferred" stock, those stockholders receive their dividend before anyone holding common stock sees any money. Corporations aren't required to issue a dividend until the date of declaration on which the board formally votes to issue one.
After the date of declaration, the accountant subtracts the amount of the promised dividends from the retained earnings account -- retained earnings are the accumulated profits that haven't been spent on dividends -- and adds it to a dividends payable amount. When the dividends go out to stockholders, the accountant subtracts the amount from the dividends payable and the cash accounts. With a stock dividend, the company subtracts the value of the new stock from retained earnings and adds it to the "stock dividend distributable" and "paid-in capital" accounts.
When a corporation issues a cash dividend, both the retained earnings and cash accounts on the corporate balance sheet go down, reflecting that the company spent retained earnings to issue a dividend. Dividends for preferred stockholders show up on the income statement as well, but common-stock dividends do not; instead, you find them in the company's cash-flow statement. The retained earnings account shows how much money the company has left over, but it doesn't tell you how large any dividend might be: A company that doesn't issue dividends but reinvests earnings in equipment can have a very large retained account.
Financial statements tell you the dollars and cents about a company's dividends, but that's not proof that it's a good investment. Companies that issue dividends are usually larger, established companies that don't experience much growth: Focusing entirely on dividends may be profitable now, but it reduces the chance of investment growth that will pay off down the road. Even dividend-producing stocks are still stocks, and subject to fluctuations in the market, so don't give up on bonds and other stable investments in favor of dividends.
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- Paying Tax on Dividends
- Definition of Dividend Boosts
- What Are Stocks Called That Pay a Dividend on a Regular Basis?
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