Dividends are a return of company profits to shareholders.
Basically, if you own shares of a company and it is making a consistent profit, the board of directors may choose to return some of that profit to you as cash. You will receive cash in your bank or stockbroking account, or via a cheque in the mail.
Common Questions about Dividends
Are dividends guaranteed?
No. No-one is holding a gun to the board of directors telling them to pay dividends (well, at least, we hope there isn’t!). Sometimes, a board of directors will think the money is better off being used by them and reinvested in the company.
How often are dividends paid?
Dividends are often paid half-yearly. These two dividends are called the ‘interim’ and ‘final’ dividends. However, dividends can also be paid quarterly.
What is a DRP?
Often, your company will give you the choice to receive the dividend as new shares in the company. This is known as a dividend reinvestment plan or DRP. In this case, the company keeps the cash for investment and just credits your stockbroking account with more shares. To entice you to do this they will sometimes issue the shares at a discount to market prices.
Why do companies pay dividends?
Companies pay dividends to keep their shareholders happy. Generally, larger and more stable companies pay a regular dividend to compensate for slower growth.
What is the ex-dividend date?
If you own shares on the day BEFORE the ex-dividend date, you will get the next dividend. The ex-dividend date is typically one day before the record date, which is the date the company determines who is a shareholder and how much they will get.
For example, if the ex-dividend date is tomorrow and you are a shareholder you will get the next dividend paid to you, even though the company may take a day to determine who is entitled to the dividend (the record date).
What is a ‘cum dividend’ share?
When a share is ‘cum dividend’ it means the shareholders of those shares will receive the next dividend. Once it passes the ex-dividend date the shares become ‘ex-dividend’. The shares will be EXcluding dividends.
What is a dividend payment date?
It is the day the dividend money is sent to you.
Why do share prices fall when a share goes ex-dividend?
Typically, companies pay dividends out of their cash reserves. As a part-owner of the company via your shares, the amount of cash in your company will be reduced. Therefore, if your company pays out $1 per share in dividends, it should be worth $1 per share less after it has paid the dividend, right? That’s why it falls.
What are franking credits?
Franking credits are a tax credit paid by companies on behalf of Australian residents. We have made an entire video dedicated to franking credits. (Hint: if you are eligible, franking credits can be tax-effective).
Can private companies pay dividends?
Absolutely. You might be the only shareholder in your own private company. You can still pay yourself a dividend. Talk to your accountant first.
What are preference share dividends?
Generally, when you buy shares on the sharemarket you get ‘ordinary’ shares. However, there are other types of shares called ‘preference shares’ that entitle those shareholders to something before ordinary shareholders. Usually, it means they get a fixed rate of dividends and must get paid before you do. Not all companies have preference shares.
What are the rules about paying dividends in Australia?
In Australia, a company’s directors can declare a dividend only if¹:
- The company’s assets are greater than its liabilities
- The dividend is fair and reasonable to all shareholders
- The company could still pay its creditors after it pays the dividend
Sources: ¹Corporations Act Cth (2001), Section 254T 1-2
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