Cash is the lifeblood of a company, and so understanding how a company's cash flow works is essential in understanding its financials. Many companies use part of the cash they generate to pay dividends to their shareholders, and those dividends show up on the cash flow statement as an outflow. Let's look more closely at the formula you'll see reflected on the cash flow statement with a company that pays dividends.
Why you'll find some dividends only on the cash flow statement
One distinction between dividends and other types of outbound cash flow is that you typically see dividends paid on common stock only on the cash flow statement. Many other types of payments, including interest on bonds and bank loans, show up as expenses on the income statement, as well. The difference is that, while bondholders only have a creditor's interest in a company, common shareholders are technically the company's owners, and so accounting rules treat the money paid to investors through dividends differently.
Some companies issue preferred stock, and when that stock pays dividends, the company has to subtract them from their net income to calculate the income attributable to common shareholders. That calculation does appear on the income statement, but you'll find both preferred and common stock dividends on the cash flow statement, as well.
Figuring the formula for dividends and cash flow
To determine how much outward cash flow results from a dividend payment, you have to know the amount of the dividend and the number of shares outstanding. For instance, if a company has 1 million shares outstanding and pays a $1-per-share quarterly dividend, then the amount of cash paid is 1 million x $1, or $1 million each quarter. That $1 million will show up on quarterly financials and add up to $4 million over the course of a full year.
When there are both preferred and common shareholders, you'll typically see separate calculations on the cash flow statement for both types of dividends. The number of shares of each type of stock can be different, as can the per-share dividend payment. Adding up the cash flow from preferred and common dividends tells you how much of the company's capital goes toward shareholders payments.
Knowing how much cash a company uses toward paying dividends is important, especially in tough economic conditions during which cash becomes scarce. A look at the cash flow statement should tell you quickly what you need to know, and give you guidance about whether that use of capital is sustainable in the long run.
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Shareholders receive value from the corporations they own or invest in through dividends or increases in company value. These dividends increase the per-share price of privately held company stock. However, most small corporations deliver value primarily through dividends, as comparatively few corporations are sold as ongoing businesses or have an initial public offering, or IPO. These stock dividends affect only one section on the cash flow statement -- the financing section.
Shareholder Withdrawals -- Stock Dividends
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Stock dividends are shareholder withdrawals or cash distributions to owners. As a shareholder, or owner, of a corporation, you are entitled to use funds distributed from the corporation's retained earnings as you deem fit. If your corporation has multiple shareholders, all of you must reach a consensus on the dividend amount and timing. Incorporating a dividend policy into your shareholders' agreement or corporate bylaws can drastically decrease the likelihood of disagreements.
Dividends and Cash Flow
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Your corporation pays dividends out of its available cash. When your corporation issues dividends, this dividend issuance shows as a reduction in cash under financing activities on the cash flow statement. Dividend payments are recorded on the cash flow statement in the financing section, because they involve owners and affect cash flow. This is the sole impact that dividend issuance has on the cash flow statement.
Cash Flow Statement
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The cash flow statement is an analysis tool for reviewing the cash flows across all the activities your corporation engages in. It links the income statement to the balance sheet and assists in understanding what is happening in the company and why it's happening. Cash flow statements record cash inflows and outflows over a specified period, typically a year or a quarter, and divide those into three major areas: operating, investing and financing.
Financing Activities
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The financing section of the cash flow statement shows how your company's financing and capital raising activities impact cash. It records the impact of activities involving the liabilities and shareholders' equity sections of the balance sheet -- those actions relative to creditors and owners. These activities include actions that increase cash -- including new term loans, mortgages, stock issuance and sales -- and actions that decrease cash, including principal repayments, balloon payments and dividends.
Example
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Say your corporation declares and issues $35,000 in stock dividends. On the cash flow statement under financing activities, the company records: stock dividends, -$35,000. By doing this, a lender or investor reviewing the statement can clearly see that the dividend issuance reduced cash by $35,000.
Cash dividends are a distribution of a corporation's earnings to its stockholders or shareholders. For cash dividends to occur, the corporation's board of directors must declare the dividends. When a corporation's board of directors declares a cash dividend on its stock, the following will occur: When the cash dividend is paid, the following will occur: The income statement is not affected by the declaration and payment of cash dividends on common stock. (However, the cash dividends on preferred stock are deducted from net income to arrive at net income available for common stock.) The statement of cash flows will report the amount of the cash dividends as a use of cash in the financing activities section.Examples of How Cash Dividends Affect the Financial Statements
Free Financial Statements Cheat Sheet
A cash dividend is the distribution of funds or money paid to stockholders generally as part of the corporation's current earnings or accumulated profits.
Cash dividends are paid directly in money, as opposed to being paid as a stock dividend or other form of value. Most brokers offer a choice to reinvest or accept cash dividends.
- A cash dividend is a payment made by a company to its stockholders in the form of periodic distributions of cash (as opposed to in stock or any other form)
- Cash dividends are often paid on a regular basis, such as monthly or quarterly, but are sometimes one-time-only payouts, such as after a settlement.
- Most brokers offer a choice to accept or reinvest cash dividends.
- Dividend-paying companies are typically established, with stable cash flow, and beyond the growth stage.
- Dividend reinvestment plans (DRIPs) are increasingly common among companies and brokers.
Cash dividends are a common way for companies to return capital to their shareholders in the form of periodic cash payments—typically, quarterly—but some stocks may pay these bonuses on a monthly, annual, or semiannual basis.
While many firms pay regular dividends, there are special cash dividends that are distributed to shareholders after certain nonrecurring events such as legal settlements or the borrowing of money for large, one-time cash distributions. Each company establishes its dividend policy and periodically assesses if a dividend cut or an increase is warranted. Cash dividends are paid on a per-share basis.
A company's board of directors announces a cash dividend on a declaration date, which entails paying a certain amount of money per common share. After that notification, the record date is established, which is the date on which a firm determines its shareholders on record who are eligible to receive the payment.
In addition, stock exchanges or other appropriate securities organizations determine an ex-dividend date, which is typically two business days before the record date. An investor who bought common shares before the ex-dividend date is entitled to the announced cash dividend.
Investors must report dividend earnings, and they are taxable as income for the recipients—IRS Form 1099-DIV will list the total amount of reportable dividend earnings.
Companies that pay dividends typically enjoy stable cash flows, and their businesses are commonly beyond the growth stage. This business growth cycle partially explains why growth firms do not pay dividends—they need these funds to expand their operations, build factories, and increase their personnel.
Certain dividend-paying companies may go as far as establishing dividend payout targets, which are based on generated profits in a given year. For example, banks typically pay out a certain percentage of their profits in the form of cash dividends. If profits decline, the dividend policy can be amended or postponed to better times.
Cash dividends are a common way for companies to return capital to shareholders.
When a corporation declares a dividend, it debits its retained earnings and credits a liability account called dividend payable. On the date of payment, the company reverses the dividend payable with a debit entry and credits its cash account for the respective cash outflow.
Cash dividends do not affect a company's income statement. However, they shrink a company's shareholders' equity and cash balance by the same amount. Firms must report any cash dividend as payments in the financing activity section of their cash flow statement.
The easiest way to compare cash dividends across companies is to look at the trailing 12-month (TTM) dividend yields, which are computed as a company's dividends per share for the most recent 12-month period divided by its current stock price. This computation standardizes the measure of cash dividends concerning the price of a common share.
Nike is a rather mature firm that pays quarterly cash dividends. In February 2022, the sportswear brand announced a $0.305 per share quarterly cash dividend payable Apr. 1, 2022. For fiscal year 2021, the company saw year-over-year (YOY) increased revenues of 19.3%. Meanwhile, earnings per share (EPS) rose 123%.
Less common than cash dividends, stock dividends instead pay shareholders with additional shares of stock.
A special dividend is paid to shareholders outside of the regular dividend schedule. It may result from a windfall earnings, spin-off, or other corporate action that is seen as a one-off. In general, special dividends are rare but larger than ordinary dividends.
A dividend aristocrat is a stock that increases its dividend for at least 25 consecutive years. Examples include AT&T, ExxonMobil, Caterpillar, 3M, and IBM, among others.