A dividend is the income disseminated to shareholders of publicly listed companies and is distributed from the underlying company’s profits – subject to the discussion and approval of its board of directors.
Dividends may be distributed as fully franked or partially franked – meaning, the underlying company had already paid the 30 per cent corporate tax, and the imputation credits are issued to shareholders to prevent double taxation.
Do all shareholders get equal dividends?
Not all shareholders get dividends because the release and receipt of this income depends on the type and class of company shares in the investor’s portfolio.
Companies may issue shares with different classes and accompanying perks.
For instance, their issued shares may be divided into these four different classes with the following benefits:
- Class A shares: Have voting rights and dividends but are only for high-net-worth investors (i.e. minimum purchase is $100,000 worth of shares).
- Class B shares: Have voting rights and dividends but are given to the company’s employees.
- Preference shares: Have similar rights but cost 1.5 times the market value of ordinary shares.
- Ordinary shares: Cheaper but only have voting rights and a potential for dividend payouts.
In this case, investors with preference shares in their portfolio are assured of dividends, while those who own ordinary shares have to wait for the company’s decision regarding dividend distribution.
Furthermore, the dividends that ordinary shareholders may receive can be smaller than what preference shareholders receive.
The scenario above, however, only serves as an example. Decisions on share class features and dividend payouts still depend on the issuing company.
When do shareholders get paid dividends?
Shareholders usually receive dividends when the underlying company makes a profit and the board of directors decides to distribute dividends over using the money for company purposes.
Why do shareholders get dividends?
Shareholders receive dividends for two main reasons: first is that they purchased dividend-paying shares; second is that the income they receive as dividends is their share of the profits as part-owners of the underlying company.
Not all companies issue dividend-paying shares. Because of this, not everyone with a shares portfolio are entitled to dividend payments. Likewise, the dividend amount is subject to the board of directors’ approval, and the amount that shareholders would receive may vary with each payout.
Which shareholders get dividends?
There are two things to consider before a shareholder can expect to receive a dividend:
- Class of share owned
- Date of ownership
Class of share owned
As illustrated above, companies may attach different features for each class of share they issue. This means the share class determines if a shareholder is entitled to dividends or not. The class and features of the shares held may also determine the amount of dividends the shareholders receive.
For instance, a preference share may entitle the shareholder to $1 dividend per unit owned, while an ordinary share may only give 60 cents per share. This means that an investor who owns 100 units of preference shares would receive $10 in dividends while another with 100 units of ordinary shares would only get $6.
Date of ownership
There are three important dates to take note of regarding dividend-paying shares: Notice of dividend, cum dividend and ex-dividend.
As its name implies, notice of dividend is when the issuing company announces that dividends will be distributed to its shareholders, the ex-dividend date and the dividend distribution date. Cum dividend is the period leading up to the ex-dividend date – the cut-off date for the transfer of ownership.
An investor who purchases shares during the cum dividend phase may or may not receive the dividends depending on when their ownership was finalised – as processing usually takes three business days. If they officially own the shares by ex-dividend date, they will receive the dividends. However, if they haven’t finalised the transfer by then, the previous owner would get the dividends.
For more information about these dates, read “Share market – basics for beginners”.
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We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians
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