Differences between cash dividends and stock dividends

May 9, 2010

Account for cash dividends and stock dividends; differences between them.

1. Nature of dividends

Dividends are a form of payment that a company may provide to its shareholders, usually out of current or accumulated earnings (i.e. retained earnings).  Companies are not required to pay out a dividend to their shareholders. The dividend amount is set by the company's board of directors and is typically paid on a quarterly basis from the company's current or retained earnings. The amount and type of dividend received by shareholders can vary from quarter to quarter or year to year, depending on the financial position of the company. When dividends are paid out they can be in several forms, for example, cash or stock dividends.

There are three dates that are important to remember when it comes to the distribution of dividends. These dates include: the date of declaration, the date of record and the date of payment. On the date of declaration, the company's board of directors determines the terms of the dividend distribution including how much is to be paid, the type of payment, the date of payment and to whom payment will be made. The date of record is a date determined by the board of directors that indicates who will receive dividends. Everyone who was a shareholder, for the specified class of stockholder shares, as of the date of record is entitled to receive a dividend payout.  The date of payment is when the dividend is actually paid out to shareholders.

For example, on March 1st XYZ Corporation's board of directors declares a quarterly dividend of $0.30 per share to all stockholders who own shares as of April 1 to be paid as of June 1st. The date that the dividends were declared is considered to be on March 1st. The date of record is considered to be on April 1st. Shareholders who sell their shares prior to April 1st will not be entitled to receive the dividend, regardless of the amount of time they have owned the shares. Conversely, anyone who buys shares of XYZ Corporation before April 1st will be entitled to receive the dividend, even if they purchase the stock on March 31st. The date of payment for this dividend is considered to be on June 1st.

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