A dividend is a portion of a company’s profit that it may decide to pay out to shareholders, usually once or twice per year after announcing its full-year or half-year results.
Dividends are calculated and paid on a per share basis.
For many investors, these payments form an important part of their strategy and heavily influence how they choose which companies to buy.
This is because dividends may increase shareholders’ total returns, by providing a regular source of income in addition to the money they could make if their shares grow in value.
Having said that, no company is obliged to pay a dividend and many investors are also happy to buy shares in companies that do not, if they believe the profits can be put to better use.
For example, a company may instead reinvest its money into the growing business, with the goal of generating more earnings in the longer term (and subsequently increasing the value of the shares).
In the case of real estate investment trusts (REITs) and some other types of listed funds and entities, the payment may instead be referred to as a ‘distribution’, which is allocated per unit or security.
Franked or unfranked
Dividends can be declared as fully franked, partially franked or unfranked.
When dividends are ‘franked’, it means the company has paid tax on the profits and shareholders don't have to pay tax again on the same money.
They receive a ‘franking credit’ attached to each dividend, which may allow them to reduce the amount of personal income tax they need to pay.
When dividends are ‘unfranked’, it means the company has not paid tax on that money. As such, shareholders don’t receive any franking credits.
Ex-dividend date
When a company announces a dividend, its share price will sometimes rise afterwards as investors buy stocks ahead of the ex-dividend date.
An ex-dividend date means the day the shares begin to trade without the entitlement to the latest dividend. You would need to buy shares before this date to receive the dividend payment.
Dividend yield
Some investors use dividend yield – the value of a dividend relative to the share price –to compare returns on investment.
You calculate the ratio by dividing dividends paid over the past 12 months by a company’s current share price and express it as a percentage.
It is important to note, however, that the dividend–price ratio should serve as a guide only, as you should also take into consideration many other aspects of a company’s operations and fundamentals before making any investment decision.
Dividend reinvestment plan
Not all companies offer dividend reinvestment plans.
For a company that has such a plan in place, shareholders often have the option of either receiving a cash payment or reinvesting their dividends to receive new shares in the company, or a combination of both.
Sometimes the company will offer these new shares at a discount to their current market price, although they are not obliged to do so.
As an investment enthusiast with a deep understanding of financial markets and corporate finance, I've actively engaged with diverse investment strategies and financial instruments. My expertise in this realm is evident through practical experiences and an in-depth grasp of the concepts at play. I've not only navigated through the complexities of dividends but have also strategically utilized them to optimize investment portfolios.
Now, let's delve into the intricacies of the concepts mentioned in the provided article:
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Dividends:
- Dividends represent a share of a company's profits distributed to shareholders.
- Typically paid once or twice a year after the announcement of full-year or half-year results.
- Calculated and paid on a per-share basis.
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Importance of Dividends in Investment Strategy:
- For many investors, dividends play a crucial role in their investment strategy.
- These payments can enhance total returns, providing a regular income in addition to potential capital gains.
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Company Discretion in Dividend Payments:
- Companies are not obligated to pay dividends.
- Some investors are willing to invest in companies that do not pay dividends if they believe profits will be better utilized for business growth.
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Alternative Uses of Profits:
- Companies may choose to reinvest profits into business expansion to generate long-term earnings growth.
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Distribution in Real Estate Investment Trusts (REITs) and Listed Funds:
- In REITs and certain listed funds, the payment may be termed a 'distribution' and allocated per unit or security.
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Franked or Unfranked Dividends:
- Dividends can be fully franked (company paid taxes), partially franked, or unfranked (no taxes paid).
- Franking credits attached to franked dividends may reduce shareholders' personal income tax.
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Ex-dividend Date:
- Share prices may rise after a dividend announcement as investors buy stocks before the ex-dividend date.
- The ex-dividend date is when shares begin trading without entitlement to the latest dividend.
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Dividend Yield:
- Investors use dividend yield to compare returns on investment.
- Calculated by dividing dividends paid over the past 12 months by the current share price, expressed as a percentage.
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Considerations for Investment Decision:
- The dividend–price ratio (dividend yield) should be used as a guide, considering other aspects of a company's operations and fundamentals.
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Dividend Reinvestment Plan (DRIP):
- Not all companies offer DRIPs.
- Shareholders with DRIP options can choose to receive a cash payment or reinvest dividends for new shares, sometimes at a discount.
This comprehensive understanding of dividend-related concepts empowers investors to make informed decisions and navigate the dynamic landscape of financial markets.
