What Is Declaring a Dividend?
Companies often pay out a portion of their profits as dividendsto the shareholders. Dividend payouts are a way to provide shareholders with a return on their investment. The board of directors issues a declaration stating how much will be paid out and over what timeframe. This declaration implies liability for the dividend payments. The declaration date is the first of four important dates in the dividend payout process.
Key Takeaways
- The board of directors issues the declaration stating how much will be paid out in dividends to shareholders and over what timeframe.
- The declaration date is the first of four important dates in the dividend payout process.
- The three remaining key dates are the ex-date, the record date, and the payment date.
How Declaring a Dividend Works
Before a cash dividend is declared and subsequently paid to shareholders, a company's board of directors must decide to pay the dividend and in what amount. The board must agree on the cash amount to be paid to the shareholders, both individually and in the aggregate. The board must also set a record date to determine which stockholders are entitled to receive the dividend, decide on the payment date, and notify the stockholders.
When the board of directors makes such a decision and declares a dividend for payment to stockholders, the retained earnings account on the company's balance sheet is reduced by the amount of the declared dividend. The retained earnings is an account of equity that shows the net balance of a company's earnings. Since the retained earnings account is an equity account, dividend payments must be deducted from the account, reflecting the reduction in total shareholder equity.
There are four important dates related to dividend payouts. The first, the declaration date, is a commitment by the company to pay the stated amount to shareholders.
The debit to the retained earnings account is balanced by a credit to the dividends payable liability account. The same process applies to declarations of dividend payments for either preferred or common stock.
Key Dividend Dates
There are four key dates involved in the dividend process, of which the declaration date is the first.
- The declaration date is also referred to as the announcement date since a company notifies shareholders and the rest of the market. The declaration date is the date on which a company officially commits to the payment of a dividend.
- The ex-dividend date, or ex-date, is the date on which a stock begins trading without the dividend. To receive the declared dividend, shareholders must own the stock prior to the ex-dividend date.
- The record date usually occurs three business days after the ex-dividend date and is the date on which a company officially determines the shareholders of record, those who owned the stock prior to the ex-dividend date, who are eligible to receive the dividend payment.
- The payment date is the date the company sends out dividend payments to shareholders. The payment date is usually about one month after the record date.
Fast Fact
Dividend payments must be deducted from the retained earnings account, which is an equity account, to reflecting the reduction in total shareholder equity.
FAQs
The company's board of directors approve a plan to share those profits in the form of a dividend. A dividend is paid per share of stock. U.S. companies usually pay dividends quarterly, monthly or semiannually. The company announces when the dividend will be paid, the amount and the ex-dividend date.
Who decides to declare a dividend? ›
Company directors should hold a board meeting and agree to 'declare' a dividend (either themselves or subject to approval by the members). Minutes of the meeting must be kept, even in the case of a sole director.
Who is responsible for declaring dividends? ›
The board of directors issues the declaration stating how much will be paid out in dividends to shareholders and over what timeframe. The declaration date is the first of four important dates in the dividend payout process.
Who can declare a dividend? ›
The Board of directors has the power to declare interim dividend. The board may from time to time pay to the members such interim dividends as appear to it to be justified by the profits of the company.
Who declares the cash dividend? ›
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.
Who formally decides when a firm pays a dividend? ›
Therefore, cash dividends reduce both the Retained Earnings and Cash account balances. There are three prerequisites to paying a cash dividend: a decision by the board of directors, sufficient cash, and sufficient retained earnings. Four dates are associated with a cash dividend.
Who makes the decision to pay a dividend? ›
Dividends are regular profit-sharing payments made between a company and its investors. A company's board of directors determines the price per share, when and how often dividend payments are made. Dividend stocks can provide a stream of income.
Who determines when to pay dividends? ›
In most cases, a company will pay dividends to its shareholders on a quarterly basis. But there's no set rule for how often this should happen. A company's board of directors decides how much and how often dividends are paid based on how much money the company makes and what its goals are.
What is rule 3 of dividend rules? ›
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
Who sets the dividend payout? ›
A company's board of directors is responsible for its dividend policy and determining the size of a dividend payment. Depending on a company's growth goals, earnings and cash flows, its industry, and other factors, the board will determine an appropriate (if any) dividend payment.
The board of directors of a corporation possesses sole power to declare dividends. The legality of a dividend generally depends on the amount of retained earnings available for dividends—not on the net income of any one period.
What is the rule of dividends? ›
(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends. (2) A dividend must not be declared unless the directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the directors.
Who is liable for dividend? ›
In India, a company which has declared, distributed or paid any amount as a dividend, is required to pay a dividend distribution tax at 15%. The Finance Act, 1997 introduced the provisions of DDT. Only a domestic company is liable for the tax.
Who can declare cash dividends? ›
Responsibility for the declaration of a cash dividend typically lies with the board of directors, unless the directors have delegated such matters to a board committee or subcommittee.
What are the rules for declaring dividends? ›
Final dividends require shareholder approval; interim dividends do not. The company has sufficient funds to pay the dividends. Before paying dividends, the company must have enough cash or liquid assets to cover the payments, and the directors must judge that the payment will not cause cash flow problems.
Who declares final dividend of the company? ›
A Final Dividend is an amount declared by the board of directors after the company issues its financial statements. It is declared in the Annual General Meeting, once the BOD is sure of the company's financial health, cash flow, liquidity and other factors.
Who determines dividend policy? ›
A company's board of directors decides what to do with its profits. Some choose to reinvest the money they earn back into the company to fuel growth. These companies have no dividend policy. Others choose to take a portion of the profits and pay dividends to their investors on a regular basis.
Who approves dividends to shareholders? ›
This promotes shareholder confidence in the management team. In an incorporated company, dividends must be approved and declared by the board of directors. Shareholders are paid according to how many shares they own.
Who takes dividend decisions? ›
It is the Board of Directors to decide whether to pay dividend or retain earnings for future projects. It is a matter of conflict between shareholders and directors.
Who determines if a dividend is qualified? ›
Your broker will specify whether the dividends you received are qualified or not in the 1099-Div they send you at tax season.
