Stocks are generally valued on earnings. The earnings are reported on the income statement -- the first financial statement most investment professionals look at. The income statement shows the revenue, expenses, and net income for a company over a period of time. There are some investment professionals who value companies on dividends and a cash flow basis. However, paid dividends are not found on the income statement but on a different financial statement.
A dividend is a cash payment to shareholders. There are generally two kinds of dividends: special dividends a company announces if it has a windfall of cash, and regular dividends a company pays either quarterly, semi-annually, or annual. A special dividend announcement usually boosts stock price. A regular dividend is already known by investors and has no effect on the stock price.
The income statement just has the revenues and expenses of a company so investors know how much profits a company had during a certain time period. It also provides the information on the number of outstanding shares. Since a dividend is not an expense, there is no place for it on the income statement. Therefore, it does not belong on the income statement but a different financial statement.
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Cash Flow Statement
On the cash flow statement, all of the cash uses and receipts are recorded. There are three sections -- operating cash flow, investing cash flow, and financing cash flow. Financing cash flow is where a company shows if it took out loans, repaid loans, issued stock, repurchased it, or made other payments to shareholders. Dividends are in the financing section because they are cash payments to shareholders.
A paid dividend also makes an impact on the balance sheet. A balance sheet lists the company's assets, liabilities and stockholders' equity. Usually, a company declares a dividend first and then pays it a few weeks or a month later. When it is declared, it is listed as dividends payable on the balance sheet and it lowers stockholders' equity because money is paid out to shareholders. After it is paid, the dividends payable account closes out and a company decreases cash because a cash payment is made.