What is a dividend?
Here is my guide as to what is a dividend. Your eligibility for receiving them. How they are normally paid out.
Types of dividend
Here are the ways that most companies pay out their dividends. When they decide to give one the their shareholders.
- Cash This is by far the most common way that companies choose to pay out their dividends. It usually takes the form of an electronic transfer or sometimes as a cheque. These dividends are usually classed as form of investment by counties and are subject to tax. For each share of a company that your own, a set amount of money is distributed. For example if you own 100 shares in a company and cash dividend is 50p a share, you will receive a dividend of £50
- Share dividend This type of dividend is where the company pays out with additional shares in the company. When a share dividend is chosen by the company you will usually get a proportion of the shares you own. So for example if you own a 100 shares in a company and the dividend is 5% you will get 5 additional shares in the company. With this type of dividend the stock is usually spit resulting in a drop of the share price.
- Stock dividend distribution This is where shares are distributed by certain partners to other partners. With this type of dividend the shares are not split so there is no drop in the share price.
- Property dividend This is where company assets are given out. This type of dividend is quite rare.
- Interim dividend This dividend are made before a company’s annual meeting (AGM) or financial statements.
Here are the major dates relating to dividends.
- Declaration date. This is the day where the board of directors make public there intention to make a dividend payment. A liability is created in the company books that it now owes money to its shareholders.
- In-dividend date. This date is one trading day before the ex-dividend date. This means that current share holders and people that buy shares on this day will be eligible for a dividend. If you sell your shares on this date you will not receive a dividend. After this day the stock becomes ex-dividend.
- Ex-dividend. This is the day where any buys or sells of shares don’t effect you receiving a dividend. It is usual on ex-dividned days for the company share price to drop by the amount of the dividend that is about to be paid. This is due to the decrease in the company’s assets due to the dividend about to be handed out to shareholders.
- Book closure date. This is the day that the company temporally close its books to fresh transfers of stock. This is also usually the same day as the record date.
- Record date. All shareholders registered in the company’s record as of this date will be paid the dividend. Any shareholders that are not registers by this date will not receive a dividend. Registration is usually automatic in most countries on any shares traded before the ex-dividend date.
- Payment date. The date at which money is transferred to the shareholders.
Most countries class a dividend as an income of the shareholder. The way this income is dealt with will depend on your country of residence.
Effect on stock price
After a companies passes the ex-dividend day its share price will usually drop.
The traditional way to calculate this share price drop is work out the financial effects from the perspective of the company. As the company has paid out a dividend out of its cash reserves the amount of its equity should decrease by a similar amount. So for example if the dividend was 10p per share, the share price should drop by 10p
This concludes my guide as to what is a dividend. If you think that I have missed something please let me know in the comments below.