Dividends are a distribution of a corporation’s earnings to its stockholders. A CORPORATION can do two things with its earnings: Pay them out in the form of dividends or retain them. Most corporations choose some combination—that is, they pay out a portion of earnings as dividends and retain the rest. A financial ratio called the dividend payout ratio measures dividends as a percentage of earnings. The payment of dividends involves three dates. The first is the declaration date, the day on which the BOARD OF DIRECTORS announces the dividend and the time line for its processing and payment. A LIABILITY, dividends payable, is created by the announcement, and retained earnings are reduced on this date by the amount of the dividend. Second is the holder-of-record date. The roster of stockholders as of this date determines who will receive the forthcoming dividend. Assume the holder-of-record date is June 24. Several days before June 24, the corporation’s stock goes ex dividend. Sales of shares after this date will not include the upcoming dividend payment. If an investor buys shares of this stock on June 22, for example, the transaction is too close to the holder-of-record date for the new owner to be listed on the roster of stockholders to receive the dividend. As a result, the new owner will not receive the forthcoming dividend. The new owner is said to have purchased the stock ex dividend, that is, without the dividend. When a stock is purchased ex dividend, the price paid per share is normally the market price less the dividend not received. The last date in the time line is the payment date. Checks are cut and mailed, effectively distributing a portion of the firm’s earnings. The liability created on the declaration date is satisfied by the payment of cash dividends. Retained earnings are the corporation’s PROFITs not distributed as dividends. The cumulative amount of retained earnings accrues in an EQUITY account of the same name. Retained earnings belong to the stockholders and have the effect of increasing the value of the firm and the WEALTH of the common stockholders. Retained earnings do not usually exist in the form of cash. Rather, most firms use the retained earnings for CAPITAL EXPENDITUREs— that is, to purchase ASSETS to foster growth and enhance the firm’s profitability.