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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.
The company's Retained Earnings line item will rise on its balance sheet, and that figure directly feeds into overall stockholder equity. By contrast, if a company pays out all of its profits to shareholders as dividends, then stockholder equity won't change. The rise in cash from the company's earnings will be offset by the use of that cash to pay dividends, and there will be no net change in retained earnings. The other reason: raising capital. The other situation in which stockholder equity goes up is when a company obtains additional equity financing by selling stock.