How dividends work

Companies may distribute a portion of their earnings in the form of dividends, to reward shareholders for their investment. It is not a requirement for a company to pay dividends, although if they do, they are usually paid twice a year.

Dividends: What you need to know

Declaration

Companies will use a declaration to announce the date of payment and the value of the dividend they intend to pay. A declaration is also known as ‘declaring a dividend’. The information contained within a declaration is often distributed to the shareholder in a letter.

Ex-dividend date

Within the information provided in a declaration, the company will include their ‘ex-dividend’ date. The ex-dividend date is important to note because in order to qualify for the dividend you must own shares on/before the ex-dividend date. It is common for the share price to drop on the ex-dividend date as buyers are not entitled to the dividend past this point.

Payment date

Payment of the dividend generally occurs sometime between 4 to 8 weeks after the ex-dividend date.

Franking credits

Franking credits are the bonus tax credits that may be received with the payment of dividends. Company earnings are distributed in the form of dividends, whilst company tax that has been paid on those profits is represented through franking credits.

The benefit of franking credits is that they may be used to reduce your taxable income. This is because they represent the company tax paid on the dividend. If you are an investor on a low marginal tax rate you may be eligible to receive a cash rebate on all or part of your franking credits. This refund is distributed by the ATO at tax time.

Dividend Reinvestment Plans (DRPs)

In lieu of receiving a cash dividend some companies may provide an opportunity to reinvest your dividend and receive additional shares in the company. Shares offered through DRPs are often at a discounted rate, providing additional incentive to the investor.

The Detail

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