Understanding Shares

Dividends

What is a dividend?

A dividend is a distribution of a company's profits to the shareholders of that company.

Dividends come from the profits earned by the company during its fiscal year (also called company earnings). Once earnings have been established, the board of directors of the company decides on what dividend, if any, to pay to the shareholders. If the company is doing badly, or if the company needs to reinvest profits, the board of directors may decide not to declare a dividend.

Dividends are usually paid on an annual basis (though sometimes semi-annually or quarterly). There are four important dates you should know about in relation to dividends:

• Declaration
  This is the date on which the board of directors announces the dividend to shareholders and when the dividend will be paid.
• Ex-dividend date
  A buyer needs to have bought shares prior to their ex-dividend date to be entitled to a dividend payment. A seller needs to still have owned shares on or after their ex-dividend date to be entitled.
  
  If a seller has sold the shares prior to the ex-dividend date and has received a dividend, this has been paid in error and a dividend reclaim will be raised to pass the dividend to the correct owner. If a buyer has bought shares on or after the ex-dividend date, they will not be entitled to the dividend
  
  You can research ex-dividend dates by logging into your account, looking in the Markets and Research, Company Research section and checking the Key Dates.
• Record date
  This is the date the company checks their register to see who is entitled to a dividend. Dividend entitlement however is still based on the ex-dividend date, not the record date.
• Payment date
  On this date, shareholders are paid the dividend. It typically comes two weeks after the record date.

Dividend cover

Dividend cover measures the ability of a company to meet payments of dividends out of earnings. It is the ratio of profits earned to dividends paid to shareholders.

Dividend yield

Dividend yield is the dividend per share expressed as a percentage of the stock price.

A high-growth company will most likely have little or no dividend yield because it will probably choose to reinvest most or all of its profits. On the other hand, a mature company with limited growth prospects might have a very large dividend yield if it chooses to distribute a large proportion of its profits. Its stock price might also be relatively low in tandem with its growth prospects, further inflating the dividend yield.