Dividends and Stockholders' Equity

In this video, I'm going to talk about how dividends affect stockholders' equity. So, the effect depends on the type of dividend. When a company declares and pays a cash dividend or a property dividend, total assets is going to go down. That's because the company's taking cash or some type of non-cash property and distributing it to shareholders. So, assets are going to go down, but also equity is going to go down. So, stockholders' decrease because the company's retained earnings is going to decrease. Why? Because the company is no longer retaining the earnings, it is distributing the earnings to shareholders. So, assets go down, equity goes down, our accounting equation continues to balance. When a company declares and pays a stock dividend, the effect is going to be different. Why? Assets aren't going to be affected at all. The company's not distributing any kind of cash or property, it's just giving out more stock to shareholders. So, equity is going to be affected, but you're going to have an increase in equity and a decrease in equity and they're going to cancel out. So, you're going to end up with a situation where there is no change in total equity. Basically, there's a reclassification of equity accounts. So, I want to give you a couple examples. I'm going to get with real companies. I'm going to give you an example with cash dividends first and then we'll do an example with stock dividends. So, the example with cash dividends has to do with the company Occidental Petroleum. And we see here I've got some disclosures from the company's 10K, their annual report. And so, related to common shareholders, in 2025, the company had $945 million of dividends that they had declared for common shareholders, which came out to 96 cents a share. In terms of preferred shareholders, because this company had issued shares of preferred stock, they also declared dividends and it was the amount of $679 million, which was calculated as 8% off of a face value of $100,000 per preferred share. So, 8% * 100,000 came out to a dividend of $8,000 per preferred share. So, 699 679 million preferred dividends, 945 million of dividends to common shareholders. So, what's going to be our effect? Well, if we look at our statement of stockholders' equity, we can see the change in total equity. And so, we've got our dividends on common stock here, that's at 96 cents per share. And then we had the 8,000 per share of preferred stock. So, these accounts right here, you see that they are going to decrease retained earnings. Here we've got the 945 million decrease for common the dividend to the common shareholders. Here's the 679 million dividend to the preferred shareholders shareholders. It's in parentheses because it's going down. Remember in accounting, when we put something in parentheses, that's a decrease. So, we're decreasing retained earnings, which is an equity account. So, we see that equity is also going to go down. So, as the company is declaring and paying these dividends to the common shareholders to the preferred shareholders, it's decreasing the company's total equity. Now, in terms of the journal entries, the date that a cash dividend is declared, the company is going to debit this temporary dividends account. So, let's just say we're talking about the common share right here, the common dividends, 945 million. So, we take 945 945, we debit dividends and we credit dividends payable, which is a liability. That liability is going to get eliminated when they actually pay out the dividends and we're going to decrease the cash account. So, this is where assets go down, when they actually pay out the cash. And then, in the closing process, that dividends account that we created, that was just a temporary account, we're going to eliminate that and we're going to debit retained earnings and credit dividends for 945 million dollars. So, the net effect of all this, we've got equity going down because retained earnings goes down and then we've got assets going down because the cash is going down. So, that's the effect of a cash dividend. Now, let's talk about stock dividend. Okay, so I found a company that is Security National Financial Corporation that issued a stock dividend. I said it was a stock dividend of 5%. So, we see here from their disclosures that a 5% stock dividend they were doing every year, 2021 through 2024. And so, we're going to focus here on 2024. And again, I've got the statement of stockholders' equity that I'm looking at to see the change in the equity accounts during the period. Now, I had told you that total assets were going to be unaffected with a stock dividend. And so, what is happening here? Retained earnings, it's going to go down because of the stock dividend. So, here's that stock dividend. So, it's going to go down, right? But

what is going to happen is you're going to have other equity accounts are going to increase. So, common stock so don't get too confused here. There was basically two classes of common stock that had this stock dividend applied to them, the class A shares, the class C shares. So, both of these are common stock on the balance sheet. So, common stock is going to increase, additional paid-in capital is going to increase. And if you take these three amounts right here, these three numbers, and you add those three numbers together, that is the exact amount of the decrease here in the retained earnings. So, what happened? Well, we have this small stock dividend, we have just this 5% stock dividend. All the shareholders are getting additional shares, but we're not actually giving them any cash, we're not giving them any non-cash property, we're just giving them more shares. So, what the company is effectively doing is reclassifying equity. They're reducing the retained earnings and then they're increasing common stock and additional paid-in capital by the same amount. So, because we have retained earnings going down by this amount and then these other equity accounts going up, there is no net effect on total stockholders' equity.