Do Dividends Increase Equity?

Dividends are earnings paid to shareholders. The payments are meant to represent shared earnings. That is, dividends usually come from retained earnings. From a technical perspective, retained earnings are considered part of stockholders' equity on the balance sheet. Any payment to stockholders from retained earnings is a reduction in their equity.

  1. Equity

    • The net income statement provides an overview of how the company makes money. It starts with revenues and deducts all expenses related to the cost of goods sold, including a portion of capitalized purchases. Net income is then determined by subtracting taxes and interest expense. What's left is considered equity by the company; that is, net income is profit for the owners of the company.

    Accounting Equation

    • Assets equals liabilities plus stockholders' equity. This is the accounting equation that provides an overview of where all the debt, investments, and income generated from company operations goes. Debt is synonymous with liabilities on the balance sheet. Investments and income generated from company operations are equivalent to the stockholders' equity section of the balance sheet.

    Retained Earnings or Debt

    • Equity means ownership in the world of finance. Dividends are cash payments to stockholders. Companies have two options when paying out dividends. They can use retained earnings, i.e., current net income, or they can use borrowed money. A company may use borrowed money because they do not want to alarm investors by cutting or not paying the regular dividend. This usually has a negative effect on the stock price.

    Yes and Yes

    • Net income is considered equity. It is shown on the balance sheet in stockholders' equity as retained earnings. Paying dividends from retained earnings decreases the equity in the company. Paying dividends with a bank line of credit or other form of debt also decreases equity, but in a smaller degree. In the long term, however, if people continue to invest in the company due to the dividend, it can have a positive influence on equity.

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