Tag Archives: Dividend Investing

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Expert Daytrader Alerts: Master The Global Financial Markets

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Follow Trades from the Experts – Daytrader Strategy Alerts Beat the Market!

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Income Investing: The Dividend Distribution Process

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Income Investing: The Dividend Distribution Process

A thriving corporation never forgets to keep on looking back on its stakeholders who contributed to their successful performance. Once they secured their financial position and came upon a decision with respect to the dividend policy, corporations usually pay out dividends to their investors as their way of giving back. This process progresses gradually in order to give time for the deliberation of the Board of Directors and for the shareholders’ documentation. 

We are going to tackle the dividend payment procedures, the essential dividend dates that must be considered, and who is entitled to claim the dividend payments. To be included here are the accounting journal entries in order to present the corporate perspective to every dividend payment stage. This article will be beneficial especially for the investors that are just starting out. 

Date of Declaration

This is the date on which the dividend payment is formally confirmed and announced by the Board of Directors. The board has finally decided what type of dividend will be distributed, the dividend size, and the date of payment. This date is also known as the “announcement date”. This is a date of which option holders must let the corporation know if they want to use their right to the option. During this date, the liability to pay out dividends to the shareholders is acknowledged on the books using this journal entry:

Retained Earnings     xxx

     Dividend Payable     xxx

In this journal entry, we debited retained earnings since the dividend to be paid out will be taken from the profit appropriated by the corporation. Dividend payable has been credited because of the corporation’s liability from its shareholders. 

Date of Record

During the date of record, the corporation indicates the shareholders who will be eligible for the dividend payment. The stock and transfer books are to be closed on this date only to complete the shareholder list for the entitlement of the subsequent dividend payment. Therefore, a journal entry for this date is not necessary. In order to use as a source in indicating the eligibility of the shareholders for the dividend payment, a fixed date must be set since stocks are effortlessly transferable.

Ex-Dividend Date

This is a time on which the right of ownership to the dividends is homogeneously dismissed by the stock brokerage four days before the date of record. It is done in order to prevent the recording of the eligible shareholders last-minute prior to the date of record. Thus, stocks transferred subsequent to the ex-dividend date will be automatically listed out from the list of shareholders entitled to the dividend payment. There is also no required journal entry for this date. 

Date of Distribution

This is a date of which shareholders will receive the dividend payment. If a cash dividend is distributed, the corporation will mail the dividend check to every eligible shareholder. This date is also called as “Payment Date”. The journal entry to be recorded for the dividend payment will be:

Dividend Payable     xxx

   Cash, Property, or Share Capital  xxx

Since the liability has been satisfied, the dividend payable is debited. While cash, property, or share capital is credited due to the distribution of the dividends. 

In order to further elaborate the dividend payment process, an example is provided below:

The board of Bank of America Corp. has formally declared dividends worth $0.18 on a quarterly basis last October 22, 2019. It has been announced that the corporation has completed the list of shareholders eligible for dividends last December 6, 2019.  To finalize the qualified shareholder list on the date of record, the ex-dividend is set on December 5, 2019. At last, Bank of America Corp. will issue dividends to the qualified shareholders on December 27, 2019. The dates are illustrated below:

Date of Declaration: October 22, 2019

Date of Record: December 6, 2019

Ex-dividend Date: December 5, 2019

Date of Distribution: December 27, 2019

 

Dividend Stocks

5 Reasons Some Companies Don’t Pay Cash Dividends To Their Shareholders

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5 Reasons Some Companies Don’t Pay Cash Dividends To Their Shareholders

As an investor, your goal in capitalizing on a trusted corporation is either to earn income from your dividends or to receive an amount of capital gains that exceed your investment. The corporation that you may have chosen has previously presented impressive performance and has been regularly paying dividends to its shareholders.

Despite the positive operation of the corporation, a time will come that it will suddenly take a break in distributing dividends. But there is nothing to worry about because it does not automatically indicate bankruptcy as there are explanations behind this occurrence. Dividend policies have a great impact on the management’s decision regarding the payment of dividends.  Investors should remember these general considerations influencing dividend market strategies:

1. Legal Limitations

Although there is no specific law that obligates firms to disseminate dividends to its shareholders, circumstances must be met concerning the dividends allocation system as imposed by law. Firms’ decisions regarding dividends are affected by these statutory restrictions:

  • Insolvency rule

If the company’s total liability has surpassed its total assets, then it signifies incapacity to pay dividends from the fact that it reflects financial insolvency.

  • Net Profit rule

Companies are allowed to distribute dividends if it earns a net profit. On the other hand, if companies incurred losses, shareholders have to wait for the companies to recover from their losses in order to receive their dividends. 

  • Dividend surpasses profit

Companies may not distribute payments if their dividend is greater than retained earnings.  If the amount of dividend exceeds its profit, it only indicates that the company is paying out too much of its dividends but does not earn or retain profit to power its growth.

  • Capital Impairment rule

The creditors’ rights must also be protected. Therefore, companies are forbidden to pay out dividends if it is taken from its capital invested in the firm.  Aside from the limitations provided by law, certain restrictions are urged by investors to the companies in order to take precautions such as requiring them to preserve a certain amount of working capital and to declare dividends subsequent in repaying debts.

2. Firm’s liquidity position

There is a misconception that a firm’s outstanding amount of profits implies its sufficiency in disbursing cash dividends to shareholders. We have to take note that cash adequacy is unconnected to retained earnings. Firms can earn profits well but can also be lacking with cash from the fact that it might be prioritizing the settlement of its debts or recapitalized its cash in the company. Dividends may not be paid if not held in cash that is why dividend payout is influenced by the company’s liquidity position. 

3. Certainty of earnings

If companies have volatile earnings, they cannot depend on internally generated funds in order to support their financial stability.  This occurrence will definitely affect the administration’s decision on whether to focus on satisfying the necessities of the company or paying dividends.

4. Deficiency in alternative financial sources

Small-scale companies tend to have a lower dividend payout ratio due to their inability to get access to capital markets. These companies that are still starting out prefer saving their generated profit as an investment rather than paying dividends. 

5. Tax in dividend income

Shareholders have a personal preference when it comes to receiving cash dividends due to the tax bracket. The tax to be incurred in receiving capital gains is much more inexpensive than in dividend income. Therefore, shareholders who have a high personal tax bracket would rather have capital gains. In addition to that, the higher cash dividend is subject to a higher tax to be paid which also affects shareholders’ decisions.

These are just the common factors that greatly affect the management in settling decisions concerning the distribution of dividends. As you devote yourself further to exploring your chosen corporation, you can also uncover the other details about its dividend policy.  

 

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