Can Stockholder's Equity Be Increased by Dividends?
When an investor purchases stock in a company, he does so with the understanding that he can earn a return on that investment in two ways. First, if the stock appreciates in value, he can sell it again. Second, if the company makes a profit, he can receive a portion of this profit in the form of dividends. The issuance of dividends can result in an increase in equity-- or the stockholder's portion of ownership in the corporation--in various ways.
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Simple Reinvestment
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A stockholder receives dividends in the form of cash. Should he desire, he can immediately take that cash and use it to purchase additional shares in the corporation on the stock market. The intrinsically fluid and easily transferable nature of corporate stock makes such immediate, active reinvestment possible. Such reinvestment would be more problematic in a partnership or LLC, which are business structures that do not represent equity in the form of stocks.
DRIPs
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Some corporations offer investors the option of engaging in a dividend reinvestment plan, or DRIP. When investors do so, they no longer receive dividends from the corporation. Instead, the corporation automatically uses the money that it would normally issue to the investor as a dividend and uses it to purchase more stock from the corporation, which increases the investor's equity in the corporation. In such programs, transaction fees are often low or nonexistent, and investors may actually receive fractional measures of stock to reflect the exact amount of money they reinvest from their dividends.
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Partial Dividend Reinvestment Plans
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With the understanding that investors may not always want to put their entire dividend values back into stocks, some corporations offer partial dividend reinvestment plans. Under these plans, investors can choose whether they want to reinvest the entire amount or collect some of the dividend amount as personal income and automatically reinvest the rest of the money.
Stock Classes
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Corporations offer two basic classes of stock: common and preferred. Unlike common stock, preferred stock delivers guaranteed dividends to its owner. As the name implies, corporations allow only certain investors to purchase preferred stock. However, preferred stockholders usually can purchase common stock as they please. Those who can normally purchase preferred stock on their own may be able to continue doing so through a DRIP, while those who cannot purchase preferred stock in normal circumstances cannot do so through a DRIP either.
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