Summary

• A dividend is defined as a distribution of profit by a company to its shareholders.
• Several companies listed on ASX pay dividends twice each year.
• However, it is not mandatory for the company to pay a dividend from earnings.

A dividend is defined as a distribution of profit by a company to its shareholders. The company’s board can decide to pay a proportion of the profit (in case of a profit or surplus) in the form of dividends to shareholders.

Several ASX-listed firms pay dividends two times a year. These dividends are known by the names – ‘interim’ and ‘final’.  However, it is not mandatory for a corporation to pay dividends twice a year.

They can even pay more or less frequently, as decided by its board.  A company may also decide to pay a 'special' dividend, which is non-recurring and generally paid in the form of cash.

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The company does not mandatorily need to pay a dividend from earnings.  However, there are companies that may decide to reinvest the earnings back into the business for its growth, considering the ongoing circumstances.

Let us understand the mechanics of dividends

The data relating to dividend is generally available the next day the company has announced the dividend. The data on the ASX website can be easily accessed by typing in the company code to view the last four dividend payments. Only cash dividends are displayed.

Generally, every company has a dividend payout ratio, which is a percentage of company earnings. Each dividend has a record date, ex-dividend date and date payable.

Record date

The record date is the cut-off date to determine which shareholders are entitled to a corporate dividend.  It is the date on which all the company must finalise all changes to registration details. According to ASX, it is 5 PM on the date a corporation closes its share register.

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Ex-dividend

The date is a business day before the company’s record date. Only those individuals who have bought the share before the ex-dividend date are entitled to a dividend. If the shares have been bought on or after the given date, the earlier owner of shares becomes entitled to the dividend. As the ex-dividend date approaches, the company’s stock price starts to surge. However, it falls after the ex-dividend date.

Date payable

It is the date on which the dividend is paid to shareholders by the company. Investors who bought their stock before the ex-dividend date are entitled to receive dividends on the payable date.

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Cum dividend

The shares are said to be cum dividend before the ex-dividend date. Investors get entitled to the recently declared dividend if the shares are purchased while they are cum dividend.

Franking credits: Why are they essential for Australian investors?

Franking credits play a very significant role for Australian investors. In Australia, bonus tax credits called franking or imputation credits accompany the dividends. The franking credits represent the company tax that has been already paid on the profits made by the company.

Franking credits help reduce the taxable income of the investors since these represent the tax that has already been paid on the dividend paid by the company, at the company tax rate.

Investors who fall in the low marginal tax rate slab may even claim a refund on part or all the received franking credits. This way, they can receive money back from the Australian Taxation Office at tax time.

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What are dividend reinvestment plans (DRPs)?

A few companies provide their shareholders with an option to reinvest dividends in the form of additional shares in the company than in cash. Such as plan is called a dividend reinvestment plan (DRP).  There are times when companies offer DRPs at a discount to the current market price to boost shareholders to continue to re-invest in the company.

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