It can be hard to choose which assets to invest in and make money. This is especially true when it comes to dividends.
Dividends are a powerful asset for investors. They can create true passive income that is different from anything else on the market today. For companies that offer dividends, these payments are always liabilities.
In this detailed guide, we will cover everything you need to know about dividends. This includes whether or not they are assets, how they are viewed by shareholders and companies alike, the differences between accrued and accumulated dividends, and more.
What Are Dividends?
Dividend investing is red-hot right now, and for good reason.
If you have the right amount of dividend paying assets in your portfolio, you can generate a lot of income from them. This is called “passive income.” You will also see the value of your stock holdings increase over time.
But just what exactly are dividends, anyway?
Well, at the end of every fiscal year any company that has turned a profit has the opportunity to redistribute some of the profits that they’ve made to their shareholders as a “dividend”.
Dividends are paid out regularly to shareholders. The most common schedule is every three months. This is a way to say thank you to people who have been loyal to the company, and it also attracts new investors.
You see, as long as you hold shares in a company that pays dividends you not only get a dividend for each individual share but you also get to enjoy the profits that your increased share value generate, too.
It’s really the best of all worlds when it comes to stocks!
Are Dividends an Asset?
On the one hand, dividends sits squarely in the asset side of the ledger – especially if you are looking at things from the perspective of an investor and a shareholder.
On the flip side of things, though, dividends are parked very definitively on the liabilities side of the ledger for the companies that are responsible for paying them out. Declarations of dividends very much create temporary liabilities for the company.
Let’s hammer this out.
Shareholders
Shareholders – anyone that owns even just an individual share of stock – always consider dividends to be assets, assets that dramatically increase the tangible value of the stock that they own.
Every time a company pays a dividend on their outstanding shares they have to first declare a certain dollar amount to be paid in the form of dividends. After that, the company disperses funding in accordance with that dividend payout per share value.
For example, let’s say that a company has to million shares outstanding. They turned a decent profit last year and have decided to offer a $0.50 dividend per share, which means they distribute $1 million in extra profit to shareholders that hold stock.
Not bad, right?
Because these dividends increase the net worth of the individual shareholder, no matter how many shares they hold, they are always going to find themselves on the asset side of the ledger.
Companies
On the flipside, though, companies that declare dividend payments are going to have to move those payments over (at least temporarily) to the liability “subaccount” in the form of dividends payable.
This liability says that the company owes shareholders money but have not yet paid them out. When the dividends are paid out, though, the liability can be wiped clean from the dividends payable ledger entry – and that means that the “cash” subaccount gets reduced by the same amount.
At the end of the day, this liability isn’t seen as a negative thing for publicly traded companies.
In fact, any company that pays consistent dividends is seen to be one of the healthier companies in business. After all, a company that anticipates profit payouts every quarter is anticipating that their stock value is going to rise and their annual profits are going to increase.
Understanding Accrued vs Accumulated Dividends
There are two specific types of dividends available on common stock, though.
Accrued dividends are dividends that have been declared by a company, but are dividends that have yet to get paid out to the individual shareholders. These dividends are technically considered to be the property of “record date shareholders” – and (at least for accounting purposes) this action turns shareholders into creditors of that specific company.
In order to earn accrued dividends a shareholder must have purchased a share of stock two days previously to the “record date” of that dividend being issued. Shares bought even just 24 hours before this dividend is issued will not be eligible for the dividend payout.
Let’s say, just for the sake of argument, though, that a company has yet to pay out dividend payments that it has already accrued.
Well, nothing happens for owners of common stock – they sort of get stuck holding the bag (so to speak). But the same can’t be said of those that hold cumulative preferred stock, though.
These kinds of shareholders on stock that very specifically outlines that any missed dividend payments need to be paid out to them specifically before those payments are made to anyone else.
This stipulation transforms accrued dividends into accumulated dividends, the kinds of dividends that are going to continue to be listed on the balance sheet of individual companies (in the liability column, no less) until they are finally paid off.
Closing Thoughts
All in all, dividends are (typically) regarded as an asset especially when seen through the eyes of individual investors.
Not just any asset, though. A powerful asset that has the potential to unlock tremendous wealth and real passive income.
If you’re looking at things from the perspective of the companies that issue dividends, however, it’s impossible to see them as anything other than liabilities. Not the worst liabilities to worry about (as dividend payments are a sign of financial health), but liabilities all the same.
