What is a Dividend?

//What is a Dividend?
What is a Dividend? 2017-10-03T05:50:30+00:00

Definition: A dividend is a corporate payment of assets or earnings to shareholders. This payment can be made in two forms: cash or stock. Both distributions have similarities and are issued in the way.

What Does Dividend Mean?

What is the definition of dividend? These payments are both a distribution of profits to the corporation’s owners and an incentive for investors to keep investing in the company. The more stock and ownership they own in the company, the more dividends they will receive in the future. The corporate board of directors is in charge of declaring and issued distributions to shareholders. This process takes several steps. Let’s take a look at an example.

Example

First, the board must decide what type and amount of distribution should be given to shareholders if any. The board then votes on the type and amount to pay each shareholder. Let’s assume the board voted on a cash distribution of $2 per share. The voting date is considered the date of declaration. This is when it’s made public that the company will issue a payment to shareholders in the future.

Second, the company has to figure out who the shareholders are on the date of declaration. This might sound kind of weird, but large, public corporations have millions of shareholders who trade stock daily. Thus, the board of directors must set a date, called the date of record, where the shareholders are counted for purposes of the dividend. Anyone who owns a share on this day will receive a payment in proportion to his or her share.

Third, the dividend is paid to the shareholders on record. This date is called the date of payment and usually follows the date of record by enough time for the company to arrange checks and payments for shareholders.

Accounting for dividends is quite simple. On the date of declaration a journal entry is made to record the amount payable to each shareholder by debiting retained earnings and crediting common stock dividend payable. When the distribution is paid, the payable account is debited and the cash account is credited.

The steps for a stock dividend are similar to the steps for a cash distribution except the accounting is slightly more complicated depending on whether a small stock dividend or large stock dividend is issued.

Summary Definition

Define Dividend: Dividends are distributions of profits or other assets to shareholders from a corporation.