Accounting for Cash Dividends

Corporations return capital back to investors through both cash dividends and stock buybacks. Ongoing capital return programs signal that the corporation is a mature business with healthy cash flow. It is critical that prospective investors learn to account for dividends to identify opportunities, calculate returns, and pay income taxes.

Dividend Payment Schedule

Take note of the ex-dividend, record, and payable dates. You must be a shareholder of record on the record date, to be eligible to receive dividends on the payable date. To be a shareholder of record, you must buy and hold shares of stock prior to and through the ex-dividend date, which typically falls two days before the record date and one month prior to the payable date. Corporate investor relations departments will post these dates; and dividends are generally paid out quarterly.

Dividend Calculations

Dividends are quoted in per share amounts. Dividend yield calculations, like interest rates, are estimates for future levels of investment income upon a set amount of principal. A $100 stock that pays out $2 in annual dividends offers a 2% dividend yield.

Dividend yields do highlight the risk versus reward tradeoffs between investing for income and investing for growth. Again, mature businesses such as Coca-Cola, McDonald’s, and Exxon will typically show 2-3% payouts. Google, however, has never paid out any dividends, so that all cash flow may be reinvested for growth. Corporations report dividend payments as financing activities on cash flow statements.

Personal Income Taxes

Dividend income will be classified as either ordinary or qualified on your 1099-DIV tax forms. For 2022, ordinary dividends are taxed at 10, 12, 22, 24, 32, 35, and 37-percent ordinary income rates. For long-term savers, qualified dividends receive favorable tax treatment and will be tax free for single filers reporting less than $41,676 in taxable income. Qualified dividends may be taxed at 20% at most.

Financial Risks

Unlike interest payments on bonds, corporations are not legally obligated to pay dividends. An abnormally high dividend yield may foreshadow corporate bankruptcy.