CommSec
6 February 2018
What is a dividend?
CommSec
A dividend is a portion of a company’s profit that it pays to shareholders. Dividends are calculated and paid on a per share basis, usually once or twice per year after full-year or half-year results are announced.
For many investors, these dividends are an important part of their strategy and heavily influence what companies they choose to invest in. This is because dividends can increase a shareholder’s 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, companies aren’t obliged to pay dividends. Plenty of investors are happy to buy shares in companies that don’t pay dividends, if they believe the profits can be put to better use.
For example, instead of paying a dividend, a company might reinvest its money into the growing business. This could allow them to generate more earnings in the longer term, and subsequently increase the value of their shares.
Real estate investment trusts (REITs) and some other types of listed funds and entities often refer to the payment as a ‘distribution’ rather than a ‘dividend’. Distributions are 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 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 as investors buy stocks ahead of the ex-dividend date.
The ex-dividend date is the cut-off point when the shares begin to trade without the entitlement to the latest dividend. You’d need to buy shares before this date to receive the dividend payment.
Dividend Yield
Dividend yield is the value of a dividend relative to the share price. Some investors use dividend yield to compare returns on investment.
You calculate the dividend yield by dividing the total dividends paid in a year by a company’s current share price. The result is expressed as a percentage.
The dividend yield should only be used as a guide. You should also consider other aspects of a company’s operations and fundamentals before making any investment decision.
Dividend reinvestment plan
Some companies offer dividend reinvestment plans, giving shareholders 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’re not obliged to do so.
To find out how you can manage your dividends visit CommSec Learn, or find out about CommSec Dividend Direction Service via our FAQ.
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