You may hear the term, ‘Dividend Declaration’ when your company earns a handsome profit. What does declaring a dividend mean? Does every company need to pay dividends to its shareholders? What impact does it have on my share value?
This article will answer all these questions and more.
Dividend declarations are the means by which shareholders and investors in companies get returns on their investment. You get dividend distributions only after your company’s Board of Directors approves the date when dividends will be distributed. you can read more about "What is dividend declaration" here
Significance of a Dividend Declaration
A Dividend Declaration is a formal announcement made by a company that it is going to pay dividends to certain categories of its shareholders.
The decision to pay dividends is always made by the Board of Directors through a resolution passed under the company’s Memorandum and Articles of Association. This Board Resolution would also specify the time frame and the amount that will be paid as dividends. In accounting terms, a Dividend Declaration results in a Debit in the Retained Earnings account and a credit in a new ‘Dividends Payable’ account. While Retained Earnings are assets, dividends that must be paid at some future date, are a liability.
Dividend: Meaning
Distributing dividends is just a neat way of saying that your company wishes to retain the trust of its shareholders and future potential investors. And so, the Board of Directors decide to distribute a part of the profits that the company has earned to shareholders who own their shares before the specified cutoff date. This cutoff date is called the Expiry Date, the Ex-Dividend Date, or more popularly, just the Ex-Date.
Important Dates Associated with Dividend Payouts
Dividend Declaration Date
Ex-Date
The Ex-Date is the date on which new share buyers will cease to expect dividend payouts announced on the Declaration Date. If you were to buy shares on which dividends were payable, even one business day before the Ex-Date, you would be eligible to receive the announced dividends.
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