The stock dividend rewards shareholders without reducing the company’s cash balance. Companies share their profits with shareholders by making cash payments called dividends. Once the company commits to make a dividend payment, it must record this future payment as an obligation in its books. “Stock dividend distributable” is the accounting entry for such an upcoming payment obligation. After original issuance, investors may trade the stock of a company on
\n secondary markets, such as the New York Stock Exchange.<\/p>\n
When declaring stock dividends, companies issue additional shares of the same class of stock as that held by the stockholders. If a company issues a 5% stock dividend, it would increase the number of shares by 5%, or one share for every 20 shares owned. If a company has one million shares outstanding, this would translate into an additional 50,000 shares. A shareholder with 100 shares in the company would receive five additional shares.<\/p>\n
The common stock account also increases by $100 to reflect the par value for the newly issued shares. At the time dividends are declared, the board establishes a date of record and a date of payment. The date of record establishes who is entitled to receive a dividend; stockholders who own stock on the date of record are entitled to receive a dividend even if they sell it prior to the date of payment. Investors who purchase shares after the date of record but before the payment date are not entitled to receive dividends since they did not own the stock on the date of record.<\/p>\n
Economists Merton Miller and Franco Modigliani argued that a company’s dividend policy is irrelevant and has no effect on the price of a firm’s stock or its cost of capital. A shareholder may remain indifferent to a company\u2019s dividend policy as in the case of high dividend payments where an investor can just use the cash received to buy more shares. A dividend is a reward paid to the shareholders for their investment in a company\u2019s equity, and it usually originates from the company’s net profits.<\/p>\n
While a few companies may use a temporary account, Dividends Declared, rather than Retained Earnings, most companies debit Retained Earnings directly. Kinder Morgan’s dividend currently yields 6.4%, putting its yield in the top 5% of those in the S&P 500. The company has already revealed plans to raise its payment by another 1.8% next year, which will be its seventh consecutive year of dividend growth. Its organic drivers (inflation-linked rate increases, volume growth as the global economy expands, and expansion projects) should boost its FFO per share by 6% to 9% annually. With inflation still elevated and a record capital project backlog, Brookfield is in an excellent position to deliver high-end organic growth over the next few years.<\/p>\n