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Cash dividends are profits paid to shareholders. Dividends on common stock are optional, but they are required for preferred stock. If a company issues additional dividend-paying common stock, it must either cut the dividend per share or increase the draw from retained earnings.Companies generally canât cut preferred stock dividends, so issuing new preferred stock will cause retained earnings to fall.Even though retained earnings decrease because of additional dividends, stockholdersâ equity might increase because the company raises cash when it issues new shares.t includes accounts for equity -- common and preferred stock -- and retained earnings, the accumulated profits of the corporation. The accounting equation requires that stockholders' equity be equal to assets minus liabilities.
A: Whether or not a dividend paid to shareholders affects the issuing company's retained earnings account depends entirely on the type of dividend. While cash dividends have a straightforward effect on retained earnings, the issuance of stock dividends is slightly more complicated.When a company wants to issue dividends to its shareholders but doesn't have excess cash on hand, it may choose to issue a stock dividend.Companies may also choose this option as a means of decreasing the value of existing shares, driving down the price to earnings (P/E) ratio and other important financial metrics.hile a small stock dividend has a greater effect on the retained earnings account, the total worth of the company actually remains unaffected by stock dividends of any size.