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Does Declaration of a Cash Dividend Decrease Its Assets?

Original post by Walter Johnson of Demand Media

A dividend is normally cash paid by a firm to its stockholders. More common among larger, more established firms, cash dividends are a means of thanking or rewarding stockholders for their loyalty. Cash dividends, unlike stock dividends, have a financial impact on the firm and the stockholders. The actual declaration of a stock dividend does little except add a liability to the firm's books.

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Dividends

Dividends can either be cash or additional stock. A cash dividend gets taxed for individuals as normal income and therefore, individual stockholders prefer capital gains rather than cash dividends. When a dividend is declared, it merely means that the board of directors has approved the dividend. The "date of record," coming shortly after the declaration, decides who gets the money and finally, there is the actual date of payment. Normally, these three aspects of dividend payments come shortly after one another.

Declarations

When a firm's board declares a dividend, there is no change in the nature or value of the firm's assets. A liability is recorded on the firm's books for that time between the declaration and the actual date of payment. There is no change in asset value even after payment because that cash is only coming out the stock. Therefore, it is only the stockholders who see a change in assets, because now they have received cash that has come out of the very stock they hold. Stockholders, as a result, now have stock valued less than before.

Policy

Dividends have no real purpose except to reward stockholders for being stockholders. Because institutions such as pension funds or universities are not taxed nearly as high as individuals, firms often offer dividends for the sake of attracting institutional rather than individual investors. Individual investors, by and large, do not benefit from the declaration of a dividend. From the date of record, the stock of the firm is sold without the dividend value attached to the stock. Outside of attracting institutional investors, the point of a dividend is to signal the market that the firm is doing well and has excess cash that it can send to its loyal investors.

Value

Since the cash dividend comes out of the stock the firm holds, the firm's stock itself is not affected. If the market is impressed by the fact that a firm has declared a dividend, this might attract more investors. If this is the case, then the increased demand for the firm's stock might increase its price, but that is independent of the financial health or productivity of the firm. Therefore, while stock price might increase, this does not mean that the firm's assets are more valuable in themselves. Their market value might increase, their book value will not.


                   

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About the Author

Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."


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