An Overview of cash dividends; Procedures for Cash Dividends; and the pros and cons of dividends and repurchases

AnOverview of cash dividends Procedures for Cash Dividends and thepros and cons of dividends and repurchases

Differencebetween a stock dividend and a stock split

Animportant part of dividend policy is the implementation of stockdividends and stock splits. These are just recapitalizations theyneither change the total investment nor distribute assets, althoughthey alter the equity accounts.

  • Stock split increases the amount of shares owned by a shareholder while the value of the shares reduces inversely. For instance, a stock split of 2-for-1 doubles the number of shares owned by a stockholder and decreases the value per share by half hence the shareholder’s stock value remains the same. Companies issue shareholders with stock dividends instead of cash dividends, and this increases the number of shares owned by a shareholder. It is beneficial as the shareholders asset increase value especially if the stock price is maintained or even increased.

  • A stock dividend is given to the stockholders to keep earnings in the company and making it more valuable in the future. Therefore the stock price of the company increases. A company performs a stock split to decrease the price of stock so that the company can reach more investors who might not have afforded the high-priced shares.

  • Stock Dividends are used when companies earn profits, but they have no available money to pay cash dividends. Stock Splits are used for reduction of the share value, when the stock price has risen to a point that proves it hard for investors to trade in the shares.

Asa shareholder, I prefer the company of interest to declare a 100%stock dividend.

Real-worldexample

Acompany has 200,000 outstanding shares of common stock of $10 parvalue. It declares 100% stock dividend. The market price per sharewas $15 on the date of declaration.

Recordsfor the declaration and payment of the stock dividend are made usingjournal entries.

Solution

Journalentry on the declaration date:

Retained Earnings

300,000

Stock Dividends Distributable

300,000

Journalentry on the distribution date:

Stock Dividends Distributable

300,000

Common Stock

200,000

Addition Paid-In Capital

200,000

TheTFC Company pays dividends on an annual basis this is contrary toother companies that pay dividends to their shareholders on aquarterly basis. TFC’s most recent dividend paid is tendollars a share.The TFC Company’s should increase their dividends considerablybecause many investors like the steady income that comes withdividends, and more investors will be attracted to buy the company’sstock. Increase in dividend payment by TFC Company will be a sign ofcompany strength and growth. It is also a sign that the managementhas definite plans for earnings in the future, making the stock moreattractive to an investor. Stock price increases because the demandof the company increased due to the attraction of many investors.Failure to increase the dividends (InvestopediaStaff, 2012), theTFC Company, may face a decrease in the number of investors who willin turn cause a decline in its stock price.

Reference

Investopedia,Staff. (2012, October 31). Why do some companies pay a dividend,while other companies do not? Retrieved March 2, 2015, fromhttp://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-a-dividend.asp