Definition
A cash dividend is a distribution of funds or earnings made by a corporation to its shareholders, typically in the form of cash. It represents a portion of the company’s profits or reserves. The amount, which is decided by the company’s board of directors, is usually quoted on a per-share basis.
Key Takeaways
- Cash Dividend is a payment made by corporations to their shareholders, typically in the form of cash.
- It is a distribution of a portion of a company’s earnings and is decided by the board of directors.
- Cash dividends are beneficial for shareholders as they provide them with a regular income, however, they also indicate that the company might not be reinvesting its earnings into growth.
Importance
Cash Dividend is an important finance term as it refers to the distribution of profit earned by a corporation to its shareholders in the form of cash.
This distribution is a critical indicator of a company’s profitability and financial health.
Shareholders highly value cash dividends because they not only provide a regular source of income but also offer insights about the company’s current and future earning potential.
Moreover, cash dividends often attract investors, impacting the company’s share price and market reputation.
Therefore, the decision to pay cash dividends is a significant one, often influencing investors’ perceptions and the company’s standing in the market.
Explanation
Cash dividends serve as a method for companies to share a portion of their profits with the shareholders, essentially rewarding them for their investment. The purpose is to provide a tangible return on investment, one that is immediate and convertible.
For companies, issuing cash dividends can be a strategy to attract or keep investors by proving that they are financially strong and capable of regularly returning profits to shareholders. This gives investors a sense of security about the company’s financial health and future.
The utilization of cash dividends can also serve as a bellwether for the financial robustness of a corporation. Companies that steadily increase their cash dividends over time may be demonstrating sustained profitability and growth.
On the flip side, a reduction or suspension in cash dividends could indicate potential financial troubles within the company. Thus, cash dividends serve not only as a tool for investors to realize income, but also as a metric by which to gauge the financial standing of a company.
Examples of Cash Dividend
Microsoft Corporation: On March 10th, 2022, Microsoft declared a quarterly cash dividend of $62 per share, payable to shareholders of record on May 19th,
This is an example of a cash dividend, where the company returns a portion of its earnings back to its shareholders in the form of cash.The Coca-Cola Company: Coca-Cola is renowned for its consistent dividend payments. For example, in February 2022, the company announced its quarterly dividend of $
42 per share, representing a cash return to the shareholders. Coca-cola has a history of paying cash dividends, reflecting its stable financial performance.Procter & Gamble: A well-established consumer goods company, Procter & Gamble has a long history of paying cash dividends. As of January 2022, it announced a quarterly cash dividend of $
8698 per share for common stock. The cash dividend was payable in mid-February 2022 to shareholders of record at the close of business in JanuaryThis represents a cash benefit shared by the company with its investors.
FAQs on Cash Dividend
What is a Cash Dividend?
A cash dividend is the distribution of funds or money paid to stockholders generally as a part of the corporation’s current earnings or accumulated profits. All shareholders of the company are eligible for the dividend if they hold the stock before a specific date.
How is a Cash Dividend paid?
Cash dividends are typically paid directly to the stockholder by the company, either in the form of a check or through a direct deposit into their bank account. Some companies also offer the option for the dividends to be reinvested into more shares of their stock.
What is the difference between Cash Dividend and Stock Dividend?
While a cash dividend provides investors with immediate liquid returns, a stock dividend increases the number of shares held by the investor. A cash dividend is a payout from the company’s earnings, whereas a stock dividend is a reallocation of the company’s retained earnings to its capital.
What determines the amount of a Cash Dividend?
The amount of a cash dividend is determined by the company’s board of directors and it depends on multiple factors such as the company’s earnings, financial health, and future capital needs. The dividend is typically expressed as a cash value per share or as a percentage of the current market price (dividend yield).
Are Cash Dividends taxable?
Yes, cash dividends are typically taxable to the shareholder in the year they are received. However, the tax rates may vary depending on several factors, including the investor’s level of income and the length of time the shares have been held.
Related Entrepreneurship Terms
- Declaration Date
- Ex-Dividend Date
- Dividend Yield
- Dividend Payout Ratio
- Record Date
Sources for More Information
- Investopedia: This comprehensive financial education website offers a wealth of explanations for various finance-related concepts including Cash Dividend.
- Nasdaq: As a platform that deals with numerous financial transactions, Nasdaq is a trusted source of information that offers in-depth explanations about Cash Dividend.
- The Motley Fool: This website is known for its investment and financial advice. It also has a detailed section describing various financial concepts including Cash Dividend.
- Seeking Alpha: This platform offers high-quality financial research and focuses on giving its users insights into numerous financial concepts, including Cash Dividend.
