DarkRange55
Enlightened
- Oct 15, 2023
- 1,699
A dividend from an accounting perspective: When a company declares a dividend, what the accountants do is on the date of declaration they debit retained earnings, thats an equity account, they reduce the equity account and they accrue a dividend payable. And if the dividend is payed, you reverse out the payable and you send out the cash. But think about what we did. We reduced equity, we took value, worth from the business and we payed it out to the shareholders. Thats all a dividend is. When the dividend is declared, when its payed out, the stock price goes down in proportion to the dividend payed. Nothing happened for the dividend except for a taxable event. Dividends are usually the result of profitability because have an increase in retained earnings. They usually pay a dividend because they have no better way to invest the money. They can use the money to buyback shares, sit on the cash or reinvest in the business. Its literally a check that reduces the price of the stock. If the dividend is reinvested you're going to have more shares but since the stock price has gone down, nothing has changed in the company's valuation. The balance is the exact same. It technically does increase income because you're converting an unrealized capital gain into taxable income that hits your 1040 tax form at the end of the year. You're going to get a tax liability. A stock's total return is its price appreciation plus the dividend. Dividends are not the magic cure all. Its just the company paying you out of their retained earnings out of their equity.
Dividend paying index funds - especially in a taxable account you're going to be very narrowly investing in a certain segment of the market which is not good. You want to buy the whole market according to the Efficient Market Hypothesis.
What you need to look for is profitability from a fundamental basis (not specifically dividends). A company's underlying earnings, profit and loss because that is generally where the dividend comes from. What drives stock prices in the long run is the ability of a company at some point to return value to the shareholders, i.e. pay a dividend. Berkshire Hathaway doesn't pay a dividend but you can still make a lot of money on that and its appreciated extremely well. People can look at the retained earnings balance of a company and say well they have the potential to pay a dividend. You pay a lot of taxes (its like a like 3 or 4). They seem tax inefficient. Either at long-term capital gains rates or preferential dividend rates or at ordinary rates for things like REITs or a non-qualified dividend.
On the date that the board of directors declares the dividend, the stockholders' equity account Retained Earnings is debited for the total amount of the dividend that will be paid and the current liability account Dividends Payable is credited for the same amount. (Some corporations will debit the temporary account Dividends instead of debiting Retained Earnings. Then at the end of the year, the Dividendsaccount is closed to Retained Earnings.)
The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited.
I prefer capital appreciation in my youth, but more dividends paid out when I get older) more safe income flow).
Dividend paying index funds - especially in a taxable account you're going to be very narrowly investing in a certain segment of the market which is not good. You want to buy the whole market according to the Efficient Market Hypothesis.
What you need to look for is profitability from a fundamental basis (not specifically dividends). A company's underlying earnings, profit and loss because that is generally where the dividend comes from. What drives stock prices in the long run is the ability of a company at some point to return value to the shareholders, i.e. pay a dividend. Berkshire Hathaway doesn't pay a dividend but you can still make a lot of money on that and its appreciated extremely well. People can look at the retained earnings balance of a company and say well they have the potential to pay a dividend. You pay a lot of taxes (its like a like 3 or 4). They seem tax inefficient. Either at long-term capital gains rates or preferential dividend rates or at ordinary rates for things like REITs or a non-qualified dividend.
On the date that the board of directors declares the dividend, the stockholders' equity account Retained Earnings is debited for the total amount of the dividend that will be paid and the current liability account Dividends Payable is credited for the same amount. (Some corporations will debit the temporary account Dividends instead of debiting Retained Earnings. Then at the end of the year, the Dividendsaccount is closed to Retained Earnings.)
The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited.
I prefer capital appreciation in my youth, but more dividends paid out when I get older) more safe income flow).
