 Hello, and welcome to this session in which we would look at the idea of dividend. What is a dividend and how does it work from an accounting perspective? Well dividend is the company's distribution of the profit to the shareholder. And that's the big idea. What does that mean? It means a company operates their business, they generate revenues, then they incur expenses. And we hope that we have more revenues than expenses. As a result, the company will generate their income, which is profit. Then what's going to happen to this profit? The company is going to take this profit and either keep it, keep the profit or distribute the profit. So first, first, first, first, first, basically they keep it. And when we keep the profit, think about it. Where do we close revenues and expenses? Well, we close them to retained earnings. So they keep it in an account called retained earnings, which is the earnings that we will retain. Then some of that profit will be paid out. When we pay out the profit to the shareholders, we call it dividend. So the point I am trying to make is this. The first point is dividend comes out of retained earnings. Retained earnings is the company's profit. Company's profit is generated from revenues minus expenses. So that's the first idea I want you to know. So dividend comes out of retained earnings. Why is this concept important? Because sometime the company could give you a distribution that's not out of retained earnings. Then that's not dividend. We call those liquidating dividend. We cover this in another recording. And you need to know about liquidating dividend for tax purposes. Liquidating dividend is beyond the scope of this lesson. But the point I'm trying to make is you have to be aware that not all distribution is dividend. The distribution has to come out of retained earnings. So I want to emphasize this point as much as possible. Cash dividend, when we pay cash dividend and usually we pay cash, we pay the dividend in form of cash reduces both assets and equity. Of course it does reduces asset because we're paying out money, cash. So it's going to reduce cash and reduce equity. We will see later in the next session that we have something called rather than cash dividend, sometime what the company would do rather than paying cash because they want to keep the cash rather than paying cash. We will give the shareholders stock, stock dividend. And we'll talk about this next. Stock dividend will not reduce assets and equity. It comes out of retained earnings. We'll see how later, but it doesn't reduce both assets and equity. So cash dividend reduces both assets and equity. Now, do all companies pay dividend? And the answer is no, not all company pays dividend. And the question should be why not? When the owner want to have all the money? And the answer is there are many reasons for that. One is the creditors. So if you have creditors, if you are borrowing money, the creditors may impose certain restrictions or limitation on your retained earnings. For example, they will tell you your retained earnings should not fall below half a million. What does that mean? It means once your retained earnings is a half a million, you can no longer pay dividend because you have to keep it at a half a million or above or any type of restriction. So that's why you cannot pay out the dividend. They simply tell you, if we're going to lend you the money, you have to suspend your dividend or you have to pay only a certain percentage of your profit in dividend. So they may impose restriction and limitation. That's one reason. Another reason, and that's basically the main reason why companies don't pay dividend, is for internal finance for growth and expansion. What does that mean? That means when the company makes a profit, they need this money to reinvest this profit into more profitable project. Take at a company like Google. Google, they make a lot of profit, a lot, billions. Do they pay it out in dividend? No. Same thing with Amazon. Do they pay out in dividend? No, at least not yet. Why? Because these companies, they are still growing and they still have many profitable projects they can invest in. So as a result, if that's the case, they're not going to pay out the cash. And as an investor, as an owner, you are better off keeping the cash at the company because Jeff Bezos, he's better off finding project. You're better off letting him find project and refinance your money. So that's why you don't pay out your profit in dividend. Well, some companies, they want to simply keep the cash on hand. Why? Bad times. Well, we're making profit this year, next year, but maybe in year three, year four, we may not make profit if the company goes south. So that's why I want to keep a cushion, cash on hand, for bad times. Now, especially tech companies and pharmaceutical, tech and pharma, they're always growing. They're always trying to find new projects. That's why they are very conservative when it comes to dividend. And you have to plan your dividend payment properly. So you have to plan the growth of dividend payment in a conservative proper way. What do I mean by this? Once a company starts to pay dividend, that gets factored, that gets baked, that gets assumed that the company will always pay dividend. It's not a law, but the investors will expect dividend. When you buy a company and the company is currently paying dividend, the company suddenly cannot stop paying dividend. They can. There's nothing against the law. No one can stop them. But if they do stop, the stock will suffer. I know, I'm aware of two companies that they had to suspend their dividend for a quarter or two. BP, Bridge Petroleum and GE, General Electric. Bridge Petroleum, when they had that spill in the Gulf of Mexico, because they needed this money for the cleanup and GE during the economic crisis because they were involved in lending money. So what they did, they suffered a lot of losses. And as a result, when they suspended their dividend for I believe two quarters, they get hammered. Therefore companies, they plan their dividend very, not conservatively. They assume once they start to pay dividend, they cannot stop. Also companies they have, if they don't pay dividend, they have to let the users of the financial statement know, give them an idea, whether they plan to pay in the future or not plan in the future, because as an investor, that's relevant. That's most relevant. As an investor, you're getting dividend. You're getting cash. And that's what you are really interested in. So the best way to show you a sample company is to show, look at Microsoft. So this is a graph of Microsoft since, I don't know, 1986, when the company went public. So notice, all the way, assets are split, which we'll talk about in the next session. So the first time, although Microsoft from 1986 till 2002, they were making a lot of profit. But guess what? The first time they paid dividend in February 17, 2003, I still remember that day, they pay eight cents per share. Then they paid, then they double it, 16 cents per share, which they didn't really double it because they skipped one quarter. Therefore they paid for two quarter. Then they kept paying eight cents. Then they paid special dividend, $3 dividend because the investors kept telling them, you have a lot of cash on hand, give us some cash, so they paid $3 and eight cents. Then they went back to eight pennies, eight pennies, eight pennies, eight pennies, eight pennies, they grow it in 2006 to nine pennies. Nine pennies, nine pennies, then they grow it to 10 pennies in 2007. And if you keep going, 13 pennies and 16 pennies in 2011, 28 pennies in 2014, 39 pennies in 2016, and now they are paying 62 pennies. So notice they started paying eight pennies in 2003 and 20 years later, they're paying 62 pennies. The point I am trying to make is this, companies plan their dividend, they plan to pay the dividend basically forever. So that's why you have to be very careful once you start to pay dividend and how much you pay in dividend. Before we proceed, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. I help you to pass your CPA exam. I help you during your accounting education. Don't shortchange yourself, invest in your career. My subscription will give you access to additional resources, lectures, multiple choice, true-false that's gonna help you understand the material better, in conjunction with your CPA review course, in conjunction with your accounting courses. This is a list of all the courses that I have on my website that include multiple choice, true-false, lectures, all organized by chapter and course. My CPA resources are aligned with your Becker, Roger, Wiley and Gleam. So you can go back and forth between my material and your CPA review course. I also give you access to 1500 previously AI CPA released questions in addition to thousands of multiple choice questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. The best way to illustrate the concept of dividend is to look at an example. So the dividend is not really a dividend, is not really a liability, is not really an obligation until the board of directors declares the dividend. So once the board of directors declare the dividend, the board of directors are the people who are in charge of the company. Those people are elected by the shareholders. Then it becomes a liability. There are three dates that are relevant to dividend and those that's the date of declaration. So let's assume a company declared a $1 million dividend. So what they do, remember, dividend comes out of retained earnings. So once they declare it, you reduce retained earnings. We declared the million dollar worth of dividend. We credit dividend payable for a million. This is the date of declaration, the first date. Then we have the date of record. On the date of record, we don't make an entry. On the date of record, we determine who are the owners of the company, who owns the stock as of that date. For example, today's date is December 23rd. Let's assume the company today declared the dividend. This is the declaration date. The date of record, January 5th. So you have to own the stock by January 5th. And the date of payment will be January the 15th. January the 15th. So what happened is this, if you own the stock on January the 5th, you get the payment on January the 15th. On January the 15th, basically we pay off the liability. We'd have a dividend payable and we credit cash. Simply put, we get root of the payable. And what we're left with is we reduced earning by a million and we reduced cash by a million. But remember what I told you, cash dividend reduced both assets and reduces equity. In contrast, what we're gonna be looking at next when we look at stock dividend, it's gonna be different. The best way to learn more about dividend is to actually go to my website, farhatlectures.com and work multiple choice questions and look at additional resources. Once again, don't shortchange yourself. I can help you with your accounting career. I can help you pass your CPA exam. Invest in yourself. The CPA exam is a lifetime investment. Study hard, good luck, and of course, stay safe.