What Is a Cash Dividend and How Does It Work?

A cash dividend is a method companies use to distribute a portion of their corporate earnings to shareholders. These payments are made in currency and represent a direct return on an investor’s ownership stake in the business. For many publicly traded companies, issuing dividends is a regular occurrence, often quarterly, and serves as a signal of the firm’s financial stability and profitability.

The Dividend Payment Process

The distribution of a cash dividend follows a public timeline involving four dates. The first is the declaration date, when the company’s board of directors formally announces its intention to pay a dividend. This announcement specifies the dividend amount per share and establishes the other dates in the process. This action creates a legal obligation for the company to pay its eligible shareholders.

The next milestone is the ex-dividend date. This is the first day that the stock trades without the value of the upcoming dividend payment included in its price. The ex-dividend date is set one business day before the date of record. An investor who purchases the stock on or after the ex-dividend date will not receive the declared dividend; the seller of the stock retains that right.

The date of record is the day the company reviews its records to identify all shareholders eligible to receive the payment. To be eligible, an investor must be listed as a shareholder on the company’s books on this specific date. The final step is the payment date, when the company disburses the cash. On this day, funds are mailed as checks or electronically deposited into the brokerage accounts of the shareholders of record.

Corporate Financial Impact

The payment of a cash dividend has a direct effect on a company’s financial statements. The transaction reduces the company’s total assets and its shareholders’ equity. The two accounts most affected on the balance sheet are Cash and Retained Earnings. Retained earnings, which represents the accumulated profits of the company that have not been distributed, is the source of the dividend.

When the board of directors first declares the dividend, it creates a liability on the balance sheet called “Dividends Payable” and simultaneously reduces Retained Earnings. This entry acknowledges the company’s legal obligation to pay its shareholders. No cash has changed hands at this point, but the company’s equity has been lowered in anticipation of the payment.

On the payment date, the company settles its obligation by paying the shareholders. This action decreases the Cash account (an asset) and eliminates the Dividends Payable account (a liability). The net result is a decrease in both cash and retained earnings. This cash outflow is reported on the statement of cash flows as a financing activity.

Shareholder Tax Considerations

Cash dividends are a form of income for investors and are subject to taxation. The tax rate applied depends on whether the dividend is classified as “qualified” or “non-qualified” by the Internal Revenue Service (IRS). This classification is reported to the shareholder by the paying company on Form 1099-DIV. The distinction between the two types is significant, as it can greatly alter an investor’s after-tax return.

Qualified dividends benefit from lower tax rates, which are the same as the long-term capital gains rates. For 2025, these rates are 0%, 15%, or 20%, depending on the investor’s total taxable income. To be considered qualified, the dividend must be paid by a U.S. corporation or a qualifying foreign entity, and the investor must meet the holding period requirement. The investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Dividends that do not meet these criteria are considered non-qualified, or ordinary, dividends. These are taxed at the investor’s regular income tax rates, which are higher than the qualified dividend rates and can range from 10% to 37% for 2025. For example, a single investor with a taxable income of $100,000 would fall into the 24% marginal tax bracket. A $1,000 non-qualified dividend would result in a $240 tax liability, whereas if that same dividend were qualified, it would be taxed at the 15% rate, resulting in a tax of $150.