Cash dividends refer to distribution of cash by a company to its common shareholders. Cash dividends are one of the means through which shareholders earn return on their investment in a company, the other being capital appreciation of shares or repurchase of shares by the company.
In case of companies, shareholders elect the board of directors which appoints the company's management and takes decisions related to the company's strategic direction. One critical decision is whether to reinvest the company's earnings or pay them back to the shareholders. When the board of directors think that the company has cash in excess of the profitable opportunities of growth, they may decide to pay dividends to the shareholders. Further, in some industries, such as utilities, companies have a history of declaring dividends which make them attractive investment for shareholders who prefer liquidity. A company can pay dividends only where it has enough cash balance and enough retained earnings.
Dividend payment timeline
Following dates are important with reference to declaration and payment of cash dividends:
Declaration date is the date on which the board of directors declare a dividend. It is the date on which they communicate their decision regarding the timing and amount of dividends to the shareholders and the capital markets.
Ex-dividend date is the date on which shares are sold without the right to receive dividends. It is normally two-business days before the holder-of-record date. For example, if Company A declares dividend of $0.5 per share on 1 April 20X5 and the ex-dividend date is 15 April 20X5, shareholders who purchase shares on 15 April 20X5 will not receive the $0.5 per share dividend, rather it will be paid to the shareholders who held those shares before the ex-dividend date.
Since a company's shareholding changes in the sense that investors buy and sell shares continuously on the stock exchange, a certain cut-off date is announced when the share transfer books are closed and a list of shareholders eligible to receive dividends is prepared. This date is called the holder-of-record date.
Dividends are paid to shareholders on the list prepared on the holder-of-record date.
Example: Accounting for cash dividends
A recent news story reads as follows:
MILWAUKEE, April 16, 2015
The boards of directors of Wisconsin Energy Corporation (NYSE:WEC) and Wisconsin Electric Power Company today declared quarterly dividends.
The Wisconsin Energy board of directors today declared a quarterly cash dividend of 42.25 cents a share on the company's common stock.
The dividend is payable June 1, 2015, to stockholders of record on May 14, 2015. This marks the 291st consecutive quarter – dating back to 1942 – that the company will have paid a dividend to its stockholders.
Identify the declaration date, ex-dividend date and holder-of-record date and journalize the transactions.
The board of directors decision is made public on 16 April 2015, hence this is the declaration date.
A liability is recognized at the declaration date for the total amount of cash dividends to be paid to all eligible shareholders. The amount determined is a product of number of common shares outstanding (i.e. total shares issued less treasury shares) and dividend declared per share. In this case dividend declared per share is $0.4225 and the number of shares outstanding is 225.51 million, hence the amount of dividends to be paid is $95.3 million. The declaration of dividends is journalized as follows:
Ex-dividend date is normally two business days before the holder-of-record date. Record date is 14 May 2015, hence the ex-dividend date must be 12 May 2015. No journal entry is passed on the ex-dividend date.
Record date is 14 May 2015. No journal entry is required to be made on this date too.
At the payment date, which is 1 June 2015, the liability related to dividends is extinguished by sending checks or making bank transfers to the shareholders. The payment is recognized as follows:
by Obaidullah Jan, ACA, CFA and last modified on
Sehemu ya fedha inahusu usambazaji wa fedha na kampuni kwa wanahisa wake wa kawaida. Dividend ya fedha ni njia moja ambayo wanahisa hupata faida ya uwekezaji wao katika kampuni, nyingine ni thamani ya mtaji wa hisa au ununuzi wa hisa na kampuni. Katika kesi ya makampuni, wanahisa huchagua bodi ya wakurugenzi ambao huteua usimamizi wa kampuni na kuchukua maamuzi yanayohusiana na mwelekeo wa kimkakati wa kampuni. Uamuzi muhimu ni kama kuwekeza tena mapato ya kampuni au kulipa nyuma kwa wanahisa. Bodi ya wakurugenzi inapoona kuwa kampuni ina fedha zaidi ya fursa za faida za ukuaji, wanaweza kuamua kulipa hisa kwa wanahisa. Zaidi ya hayo, katika baadhi ya viwanda, kama vile huduma, makampuni na historia ya kutangaza gawio ambayo kufanya yao kuvutia uwekezaji kwa wanahisa ambao wanapendelea uwiano. Kampuni inaweza kulipa gawio tu ambapo ina kiasi cha kutosha cha fedha na kiasi cha kutosha cha mapato yaliyowekwa. Tarehe ya malipo ya gawio: Tarehe ya malipo ya gawio ni tarehe ambayo bodi ya wakurugenzi inatangaza gawio. Ni tarehe ambayo wao kuwasiliana uamuzi wao kuhusu wakati na kiasi cha gawio kwa wanahisa na masoko ya mtaji. Ex-dividend tarehe ni tarehe ambayo hisa ni kuuzwa bila haki ya kupokea gawio. Ni kawaida siku mbili za biashara kabla ya tarehe ya mmiliki wa rekodi. Kwa mfano, ikiwa kampuni A inatangaza gawio la $ 0.50 kwa hisa tarehe 1 Aprili 20X5 na tarehe ya ex-dividend ni 15 Aprili 20X5, wanahisa ambao wanunua hisa tarehe 15 Aprili 20X5 hawatapokea gawio la $ 0.50 kwa hisa, badala yake italipwa kwa wanahisa ambao waliweka hisa hizo kabla ya tarehe ya ex-dividend. Kwa kuwa hisa za kampuni hubadilika kwa maana ya kuwa wawekezaji hununua na kuuza hisa mara kwa mara kwenye soko la hisa, tarehe fulani ya kukatika inatangazwa wakati vitabu vya uhamisho wa hisa vimefungwa na orodha ya wanahisa wanaostahili kupokea gawio huandaliwa. Tarehe hii inaitwa tarehe ya mmiliki wa rekodi. Dividend hulipwa kwa wanahisa kwenye orodha iliyoandaliwa tarehe ya mmiliki wa rekodi. "Mfano: ""Kuhesabu kwa ajili ya gawio fedha"" Habari ya hivi karibuni inasema kama ifuatavyo: ""Milwaukee, Aprili 16, 2015 Bodi ya wakurugenzi wa Wisconsin Energy Corporation (NYSE: WEC) na Wisconsin Electric Power Company leo alitangaza gawio robo mwaka." Bodi ya wakurugenzi wa Wisconsin Energy leo ilitangaza gawio la kila robo mwaka la fedha la senti 42.25 kwa hisa ya kawaida ya kampuni. Sehemu ya hisa itatolewa tarehe 1 Juni 2015 kwa wanahisa wa rekodi tarehe 14 Mei 2015. Hii ni robo ya 291 mfululizo - kuanzia mwaka 1942 - ambayo kampuni hiyo imelipa gawio kwa wanahisa wake. Kutambua tarehe ya tangazo, ex-dividend tarehe na mmiliki wa tarehe ya rekodi na journaling shughuli. Uamuzi wa bodi ya wakurugenzi umefanywa hadharani tarehe 16 Aprili 2015, kwa hivyo hii ni tarehe ya tangazo. Dhima ni kutambuliwa katika tarehe ya tangazo kwa kiasi cha jumla ya gawio la fedha kulipa kwa wanahisa wote wanaostahili. Kiasi kilichotambuliwa ni bidhaa ya idadi ya hisa za kawaida zilizopo (yaani jumla ya hisa iliyotolewa minus hisa binafsi) na gawio alitangaza kwa kila hisa. Katika kesi hii, gawio lililotangazwa kwa kila hisa ni $ 0.425, na idadi ya hisa zilizopo ni $ 225.51m, kwa hivyo kiasi cha gawio la kulipwa ni $ 95.3m. Taarifa ya gawio ni journaled kama ifuatavyo: Ex-gawio tarehe ni kawaida siku mbili za biashara kabla ya tarehe mmiliki wa rekodi. Tarehe ya rekodi ni 14 Mei 2015, kwa hiyo tarehe ya ex-dividend lazima iwe 12 Mei 2015. Hakuna kiingilio cha jarida hupitishwa kwenye tarehe ya ex-dividend. Tarehe ya kumbukumbu ni 14 Mei 2015. Hakuna maandishi ya jarida yanayohitajika kufanywa tarehe hii pia. Katika tarehe ya malipo, ambayo ni Juni 1, 2015, dhima inayohusiana na gawio huondolewa kwa kutuma hundi au kufanya uhamisho wa benki kwa wanahisa. "Kama ilivyoelezwa hapo juu, ""Obaidullah Khan, ACA, CFA na mwishowe ilibadilishwa tarehe."