Welcome to What is a Dividend? For many investors, an important consideration is whether a company pays dividends and the size of those dividends. Dividends are a payment from a company to its shareholders. The term dividend is used because the company's profits are being divided up amongst its shareholders.
Dividend amounts are usually expressed in cents per share and are paid out on a per share basis. So the more shares you own, the more dividends you will receive. In assessing the merits of a company's dividend, investors calculate the dividend yield.
This shows how much a company pays out in dividends each year relative to its share price. Dividend yield is calculated as follows. Annual dividends per share. over price per share. Using the dividend yield investors can compare the historical income return being paid by different companies.
Dividends aren't guaranteed. You should bear in mind that past performance is no guarantee of future performance. There is no requirement for a company to pay a dividend. A company may pay a dividend one year and not the next, although they try to be consistent where possible. The company may not have made a profit and might not be able to pay a dividend that year.
Also, some profitable companies choose to reinvest their earnings back into the business, rather than pay dividends to shareholders. Companies that do pay dividends tend to follow a regular policy of paying dividends to shareholders. you can search for the latest dividends on the ASX website.
If paid, dividends are usually received by shareholders twice yearly, as an interim dividend and a final dividend, although the dates for these payments will vary between companies. After you become a shareholder, The company's share registry will send you a number of forms to complete, including bank account details. If preferred, there is also an online facility where this can be done.
Any dividends will be paid into your nominated account, or a cheque will be sent to you, so it's important to keep your account details up to date. There are two important dates relating to dividends, which decide eligibility to receive the current... dividend. The record date is 5pm on the date specified by the company. Whoever is on the register as a shareholder of the company at that time is entitled to receive the current dividend.
It takes time for records of ownership to be changed after shares have been traded. Therefore, an ex-dividend date is set at four business days before the company's record date. This means that to be entitled to the current dividend, you must have purchased the shares before the ex-dividend date.
If you buy the shares before the ex-dividend date, you will be buying them come dividend, which means with an entitlement to the current dividend. However, shares bought on or after the ex-dividend date do not receive the current dividend. You should check whether a share is trading come or ex-dividend before you trade.
Something else you should consider is imputation credits. This can have a significant impact on your after-tax income. For some companies, dividends will have been paid out of profits on which the company has already paid tax.
For franked dividends, the shareholder will not be taxed on the full amount of the dividend income that they received. For some investors, for example those with superannuation funds that pay lower tax, the imputation credit may result in a tax credit, which can be offset against other income. You can find more about this on the ASX website and the website of the Australian Taxation Office. We hope you found this tutorial useful. We recommend you try the others in the series as well.
For more information, email us at investor.education at asx.com.au.