When companies earn a net profit after tax, they may declare a dividend payment to all shareholders. The dividend is your part of the company’s profit as you own part of the company. The dividend payment is calculated on a ‘per share’ basis so all shareholders receive a dividend proportional to their level of ownership (i.e., how many shares they own).
Not all companies pay dividends, as companies are under no obligation to do so. Those that do, normally pay them twice a year. The first for the financial year is referred to as the interim dividend and the second, the final dividend.
Dividend payments involve a few different dates, as follows:
- ‘Books closing date’ – this theoretically determines who is entitled to receive the dividend payment by identifying the names on the company’s share registry, i.e. the shareholders on that day.
- ‘Ex-dividend’ – Five business days before the ‘books closing date’, the shares are usually quoted/traded as ‘ex-dividend’. Shares sold ‘ex-dividend entitles the seller and not the buyer to the dividend payment. Generally, the market price should drop to reflect the size of the dividend.
- ‘Payment’ date – this is usually a couple of weeks later and is the day that actual payments are made (i.e. cheques posted, direct deposits etc).
Knowing ‘ex-dividend’ dates is vital to traders to ensure you are not surprised by a sudden fall in the share price.
Some companies pay dividends that are franked or partially franked. Franked dividends are dividends paid out of profits that the company has already paid tax on. The shareholder also receives an imputation credit, which is a reduction in the amount of income tax that has to be paid up to amount that has already been paid by the company. Imputation effectively removes double taxation. The present company tax rate is 30%.
Some companies have a system whereby you can have your dividend payment provided to you in the form of additional shares in the company instead of a cash payment. This system is known as a dividend reinvestment plan or DRP. Often the price used to calculate your share entitlement is a small discount off the present market price and you are charged no brokerage for the transaction.
Enrolment in such a DRP is not compulsory and would depend on your financial position and goals. Those requiring income from their investments would consider receiving the dividends, whilst others interested in capital growth would warm to the idea of acquiring additional shares instead of a cash payment.