Which of the following statements about dividends is true?

Dividends are a distribution of a company's profits to its shareholders, and the process of declaring and paying dividends impacts the retained earnings of a company. When dividends are paid out, they are deducted from retained earnings on the balance sheet. This reduction occurs because retained earnings represent the portion of net income not distributed to shareholders and instead reinvested in the business. Therefore, when a company declares a dividend, it decreases the amount of retained earnings to reflect the portion of earnings being distributed to shareholders.

The other statements do not accurately describe the nature of dividends: they are not mandatory for all companies, as companies can choose to retain profits for growth; dividends do not increase retained earnings, but rather decrease them; and although some companies may choose to reinvest their earnings into operations, dividends represent a portion of those profits that are distributed rather than reinvested.