What is a Cash Dividend?

A cash dividend is a cash payment that is extended to shareholders by the issuing company. Dividends are normally paid according to terms that are outlined in the bylaws of the corporation, unless the board of directors works with the shareholders to defer payments for a period of time. Generally, cash dividends are paid out of the profits earned by the corporation during the period cited, although it is possible for a cash dividend to be paid even when there is no net profit for the fiscal period under consideration.

The actual cash distribution of the cash dividend will take place according to established procedures that are put in place at the time of that the shares of stock are issued. For many years, a cash dividend was paid through the use of a check issued by the corporation. The checks would be accompanied with supporting paperwork that would address the period of time covered by the amount of the dividend, providing the shareholder with information on how the face value of the payment was calculated. In many instances, this is still the preferred method of distributing a cash dividend payment to shareholders.

Over time, other methods of delivering the cash dividend have become common. Some corporations offer the option of an electronic funds transfer to a bank account designated by the shareholder. When this option is selected, the shareholder can receive notification of the issuance of the cash dividend, along with supporting documentation that includes the date and transaction number associated with the funds transfer. With the advent of the Internet, it is possible to receive the documentation as electronic documents, rather than hard copies through the mail.

Before any cash dividend is paid, the calculations and distribution process must be reviewed and approved by the board of directors. Typically, the company does not withhold taxes from the cash dividend. This means that the shareholder will be responsible for paying any applicable taxes associated with the reception of the cash dividend.