Does the Declared Dividend Affect an Owner's Equity?

by Jack Ori

Dividends are a percentage of a stock's value that companies pay out to stockholders on a quarterly or annual basis. Before paying out dividends, the board of directors must declare dividends. Declaring dividends means making a formal statement announcing how much stockholders will get per share. Stockholders' equity goes down temporarily when the board of directors declares dividends.

Shareholders as Owners

Shareholder's equity refers to the portion of the company that you own based on the number of shares you own. If the company's assets increase and/or its liabilities decrease, your shareholder's equity goes up. However, if assets decrease and/or liabilities increase, your shareholder's equity goes down.

Increase in Liability

If the board of directors declares dividends, the dividends are considered a liability until the company pays them. Declaring dividends means announcing that dividends will be paid at some future date. Thus, the company's liability increases by the amount of the declared dividends. Shareholders become creditors that the company owes dividends to, and their equity in the company goes down because of the increased liability.

Effect on Assets

Declared dividends do not affect assets. The company does not pay the dividends immediately upon declaring them, so it does not use assets to pay them. Therefore, the assets do not go down. Since declared dividends are an expense that must be paid, assets do not go up either. Thus, assets do not offset the company's liability when the company declares dividends.

Net Effect

When a company declares dividends, it negatively affects shareholder's equity. Since liabilities increase without assets increasing, the company is worth less than it was prior to the dividend declaration. As a result, each shareholder's equity in the company decreases slightly. Once the dividends are paid, they are no longer a liability; however, assets will decrease because of the payment. The equity will rise again as the company takes in more revenue and reduces its liabilities.