Dividends received

Definition

Dividends received refer to the distribution of a portion of a company's earnings to its shareholders, typically in the form of cash or additional stock. In the context of trading securities, dividends can be an important source of income for investors holding these securities, influencing their investment strategies and decisions.

5 Must Know Facts For Your Next Test

1. Dividends received on trading securities are recognized as income on the income statement when they are declared, not necessarily when they are paid.
2. The treatment of dividends received can differ depending on whether the investor uses the cost method or equity method for accounting purposes.
3. If dividends are reinvested, this can lead to compounded growth over time, enhancing the overall return on investment.
4. For tax purposes, qualified dividends may be taxed at a lower capital gains rate compared to ordinary income, which can influence an investor's tax strategy.
5. Investors often look at dividend yields as a measure of return when evaluating trading securities, influencing their buying and selling decisions.

Review Questions

• How do dividends received impact an investor's income statement and cash flow?
  • Dividends received are recorded as income on the income statement when declared, which increases total revenue for the reporting period. This inflow of cash contributes positively to cash flow from operating activities. Investors need to keep track of these dividends as they can significantly affect both reported earnings and actual liquidity available for further investments or expenses.
• Discuss how the treatment of dividends received may differ based on whether an investor uses the cost method or equity method.
  • Under the cost method, dividends received are recognized as income when they are declared and do not affect the carrying amount of the investment. In contrast, under the equity method, dividends reduce the carrying amount of the investment since they represent a return on investment rather than income. This difference can significantly impact financial statements and investors' perceptions of profitability and asset value.
• Evaluate how an investor might strategize differently with trading securities based on dividend yields versus capital gains.
  • Investors focused on dividend yields may prioritize purchasing stocks that provide consistent and high dividend payments, viewing these as a stable income source. Conversely, those emphasizing capital gains might opt for growth stocks that do not pay dividends but reinvest earnings for expansion. Understanding this distinction helps investors align their portfolios with their financial goals and risk tolerance, impacting decisions related to trading securities.

Related terms

Trading securities: Investments in debt or equity securities that are bought and held primarily for sale in the near term to generate income on short-term price changes.

Cash dividends: Payments made by a corporation to its shareholders in cash, usually on a per-share basis.

Stock dividends: Additional shares of stock distributed to existing shareholders instead of cash, increasing the number of shares they own but not changing their overall investment value.