Dividends

Cash Dividends

Its a corporate distribution to its owners / shareholders

The board of directors has the legal authority to declare dividend

directors, shareholders are not liable for debtss, so they need limits on teh dividends to protect creditors. Note: theboard is there to protect the interests of the shareholders (not the creditors).

Thre are statutory restrictions on the amount of dividends that a company can pay.

Pay dividends "out of earnings"...from retained earnings, and not "out of capital"...contributed capital

Debit retained earnings and not debited against contributed capital accounts. Note: "capital" is the total amount paid by shareholders.

Note: retained earnings does not equal the amount of cash available for dividends payments

In corporate finance, you learn the techniques for managing cash. Like other cash needs, you need to anticipate cash needs for dividends. Might need to borrow money to pay dividends.

There might be some contractual limits on the amount of dividends that a company can pay. You need to read the notes after the financial statements.

A company usually pays less dividends than they are allowed to pay. some reasons why they may choose to pay less are:

1. they dont have enough cash

2. hold back dividends in good years to have some available in bad years

3. expansion plans take up cash

4. used cash to pay off creditors

5. cash used to repurchase shares.

note: Dividends to not effect the income statement . They are not expenses. They go directly on the Balance Sheet.

Stock Dividends

when a company gives all of its shareholders more stock (in proportion to the # of shares they previously owned). This does not change the economic value of anyones stocks because there are now more shares, each worth a little less. So, if there is no economic value, then why do so many companies offer stock dividends?

This is an accounting trick done to move value from the Retained Earnings account to the Contributed Capital account (both apart of the general Owners equity account). In accounting terms, you debit retained earnings (decreasing it) and you credit common stock or paid in capital accounts (increasing them for the same amount).

What it does is that it indicates to investors that there is now less availability of funds for future dividend payments (since dividends have to come from the "earnings" account, and not the "capital" account).

Dividend Yield (on global stock markets)

SPX with a divvy yield of 3.8%; the FTSE has a yield of 6.4%; the Nikkei has a yield of 3.0%, and the Eurostoxx has a yield of 8.2%. Yowsah! Who needs bonds when you can buy equities