When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
The different forms of dividend payments
Reinvesting the dividends from your assets is an excellent way to build long-term wealth, provided you know how it works, understand the tax implications, and crunch the figures in advance.
Big ideas
- There are many types of dividend payments, but most commonly, the term refers to payments to shareholders in the form of either stock or cash.
- It is at the company's discretion whether to issue dividends or reinvest profits.
- Reinvesting dividends from established companies has long been regarded as one of the most potent ways to build and maintain wealth, even during economic uncertainty.
When a company makes a profit, accumulating retained earnings means that they can either be reinvested in the company or distributed to shareholders. Dividends are approved by the board of directors of a given company and can be paid in a variety of ways.
Dividends are paid equally to all shareholders of the same class, holding either common or preferred stock. Dividends are first declared and are then paid on a specific date, known as the payment date.
To understand how profitable a given company is and how much of those profits they are entitled to as a shareholder, potential investors will want to take a look at both the company’s earnings per share (EPS) and dividends per share (DPS). EPS denotes how profitable a company is for each share of stock, but this figure can be diluted by stock splits and other events such as the exercising of employee stock options.
DPS is a measure of the value of the dividends a company pays out per share of stock. While all companies have an EPS, only dividend-paying companies have a DPS for analysis.
Dividends are most frequently paid out quarterly. In rare instances, they can even be paid out monthly.
Dividends are paid equally to all shareholders of the same class, holding either common or preferred stock. Dividends are first declared and are then paid on a specific date, known as the payment date.
To understand how profitable a given company is and how much of those profits they are entitled to as a shareholder, potential investors will want to take a look at both the company’s earnings per share (EPS) and dividends per share (DPS). EPS denotes how profitable a company is for each share of stock, but this figure can be diluted by stock splits and other events such as the exercising of employee stock options.
DPS is a measure of the value of the dividends a company pays out per share of stock. While all companies have an EPS, only dividend-paying companies have a DPS for analysis.
Dividends are most frequently paid out quarterly. In rare instances, they can even be paid out monthly.
An introduction to dividend payments
The following steps describe what you can expect for how dividends are paid out when you’re a shareholder:
- The company generates profits as well as retained earnings.
- The board of directors decides to make dividend payouts instead of reinvesting back into the company.
- The dividend is formally approved by the board of directors.
- The company announces the details of the planned dividend (the value per share, payment date, type of dividend, etc.).
- On the payment date, shareholders are paid the dividend.
You can easily check the dividends per share for a given company in a particular period by looking at its financial statements, such as the statement of earnings. This will clearly indicate the dividends declared per common share.
The Trading 212 app makes it very simple to see all the dividend information you need for any particular investment. The following image shows an example of a dividend payment from Apple (AAPL). The payment per share at the specific period indicated in the screenshot is $0.24, so in this example, owning 0.554 shares (a fractional share) would result in a payment of $0.133.
The Trading 212 app makes it very simple to see all the dividend information you need for any particular investment. The following image shows an example of a dividend payment from Apple (AAPL). The payment per share at the specific period indicated in the screenshot is $0.24, so in this example, owning 0.554 shares (a fractional share) would result in a payment of $0.133.
Note that there are two types of dividends for UK companies. Interim dividends and final dividends.
Interim dividends are dividends paid to shareholders during the company's financial year before the final determination of its full-year profits. They are typically paid out of the company's accumulated earnings or distributable reserves. Interim dividends are usually declared and distributed at regular intervals, such as quarterly or semi-annually, depending on the company's dividend policy.
Final dividends, as the name suggests, are dividends declared and paid by a company at the end of its financial year. They represent the company's final distribution of profits for the financial year. The final dividend amount is determined based on the company's audited financial statements, which reflect its actual earnings and financial performance for the entire financial year.
Interim dividends are dividends paid to shareholders during the company's financial year before the final determination of its full-year profits. They are typically paid out of the company's accumulated earnings or distributable reserves. Interim dividends are usually declared and distributed at regular intervals, such as quarterly or semi-annually, depending on the company's dividend policy.
Final dividends, as the name suggests, are dividends declared and paid by a company at the end of its financial year. They represent the company's final distribution of profits for the financial year. The final dividend amount is determined based on the company's audited financial statements, which reflect its actual earnings and financial performance for the entire financial year.
A look at dividend-paying companies
‘Dividend Aristocrats’ is the term used to describe S&P 500 companies that have increased their dividends for over 25 years; some have been doing so for much longer. This table lists the Dividend Aristocrats along with the number of consecutive years they have increased their dividend payments as of 2022.
Company | Years of Dividend Increases |
66 | |
64 | |
60 | |
60 | |
60 | |
59 | |
50 | |
47 | |
45 | |
45 |
Many others of the world’s most powerful enterprises, including IBM, Netflix, Microsoft, Exxon, and Apple, also have a powerful history of dividend payouts.
Investing in dividend-paying stocks is known to be one of the best ways to survive and even thrive during a recession. Those companies with a history of dividend payouts tend to be the ones that survive economic hardships and even emerge with excellent profits and larger market share after them.
How dividends are calculated
The primary determinant for the calculation of dividends is a company's available profits. You can find the information about this in its financial statements, specifically the profit and loss statement or income statement.
Trading 212 offers direct access to company financial statements. When you tap on any instrument, scroll to ‘Financials’ to see the income statement, or go right to the bottom and tap ‘Instrument Details’ to access the annual report.
The company's board of directors assesses the financial health, profitability, and capital requirements before deciding on the dividend amount to be distributed. The directors consider factors such as current and projected earnings, cash flow, retained earnings, and any legal or regulatory restrictions.
To calculate the dividend per share, the total amount of dividends to be distributed is divided by the number of outstanding shares held by shareholders.
NOTE: Special dividends are one-time dividend payments made by a company to its shareholders.
Trading 212 offers direct access to company financial statements. When you tap on any instrument, scroll to ‘Financials’ to see the income statement, or go right to the bottom and tap ‘Instrument Details’ to access the annual report.
The company's board of directors assesses the financial health, profitability, and capital requirements before deciding on the dividend amount to be distributed. The directors consider factors such as current and projected earnings, cash flow, retained earnings, and any legal or regulatory restrictions.
To calculate the dividend per share, the total amount of dividends to be distributed is divided by the number of outstanding shares held by shareholders.
NOTE: Special dividends are one-time dividend payments made by a company to its shareholders.
FORMULA & EXAMPLE
Dividend Per Share = (Total Dividends in a Period - Special Dividends) ÷ (Shares Outstanding)
For example, if a company declares a dividend of £10,000 and has 100,000 outstanding shares (assuming no special dividends) the dividend per share would be £0.10.
For example, if a company declares a dividend of £10,000 and has 100,000 outstanding shares (assuming no special dividends) the dividend per share would be £0.10.
Note that different classes of shares might have varying entitlements or preferential treatment in terms of dividends. Some shares may have fixed dividend rates or be entitled to higher dividend amounts before other classes of shares receive their portions.
It's also worth noting that companies may have specific policies or formulas to determine the dividend amount. They might consider factors like dividend cover, which measures the ratio of profits available for distribution compared to the dividend paid, or use a target payout ratio.
Shareholders should review the company's financial statements, dividend policy, and any relevant announcements to understand the dividend calculation methodology employed by the company.
It's also worth noting that companies may have specific policies or formulas to determine the dividend amount. They might consider factors like dividend cover, which measures the ratio of profits available for distribution compared to the dividend paid, or use a target payout ratio.
Shareholders should review the company's financial statements, dividend policy, and any relevant announcements to understand the dividend calculation methodology employed by the company.
What are the different forms of dividend payments?
Most commonly, dividends are paid in stock or cash, but there are a lot of ways through which companies can provide incentives for shareholders, depending on the circumstances.
1. Cash dividends
These are profits a company distributes to its shareholders in the form of cash payments. When a company declares a cash dividend, eligible shareholders receive a cash amount for each share they own. These payments are typically made directly to shareholders' bank accounts through electronic transfers or by issuing checks.
Cash dividends allow shareholders to receive a direct return on their investments and provide them with a source of regular income from the company's profits.
Cash dividends allow shareholders to receive a direct return on their investments and provide them with a source of regular income from the company's profits.
2. Stock dividends
Also known as bonus shares, are a form of dividend payment where a company distributes additional shares to its shareholders instead of cash. Shareholders receive additional shares proportionate to their current holdings, increasing the number of shares they own without altering their proportional ownership in the company.
Stock dividends are usually issued when a company wants to reward shareholders with additional equity while conserving its cash reserves. They allow shareholders to benefit from the company's retained earnings by increasing their ownership stake in the company.
Stock dividends are usually issued when a company wants to reward shareholders with additional equity while conserving its cash reserves. They allow shareholders to benefit from the company's retained earnings by increasing their ownership stake in the company.
3. Liqduidating dividends
A liquidating dividend, also known as a liquidation dividend, is a distribution of assets made by a company to its shareholders when it is in the process of liquidating or winding up its operations. It is typically paid when a company decides to cease its business activities, sell off its assets, and distribute the proceeds to its shareholders.
4. Special dividends
These are one-time dividend payments made by a company to its shareholders. These dividends are often declared when the organisation has excess cash/profits beyond its regular distributions in a given period.
Special dividends are typically larger than regular dividends and are often declared as a result of exceptional events such as asset sales, windfalls, or extraordinary profits. Unlike regular dividends, special dividends are not part of the company's regular dividend policy and are not expected to be recurring in nature.
Special dividends are typically larger than regular dividends and are often declared as a result of exceptional events such as asset sales, windfalls, or extraordinary profits. Unlike regular dividends, special dividends are not part of the company's regular dividend policy and are not expected to be recurring in nature.
5. Property dividends
This term refers to the distribution of assets or property by a company to its shareholders instead of cash or additional shares. In a property dividend, the company transfers physical assets or investments it holds to its shareholders. This could include shares of other companies, real estate, or any other valuable assets.
Property dividends provide shareholders with an alternative to receiving cash or stock dividends and allow them to directly benefit from the company's assets or investments.
Property dividends provide shareholders with an alternative to receiving cash or stock dividends and allow them to directly benefit from the company's assets or investments.
6. Scrip Dividends
These allow shareholders to receive additional shares of the company's stock instead of cash dividends. Essentially, the company issues new shares to shareholders in proportion to their existing holdings.
A company announces a scrip dividend option, giving shareholders the choice to receive additional shares or cash. If shareholders choose the scrip dividend, new shares are issued to them based on a predetermined ratio, aiming to maintain equivalent value. This issuance of new shares can dilute existing shareholders' ownership. Tax implications may arise, so consulting tax professionals is advisable.
A company announces a scrip dividend option, giving shareholders the choice to receive additional shares or cash. If shareholders choose the scrip dividend, new shares are issued to them based on a predetermined ratio, aiming to maintain equivalent value. This issuance of new shares can dilute existing shareholders' ownership. Tax implications may arise, so consulting tax professionals is advisable.
7. Preferred Dividends
These refer to the fixed, regular payments made to holders of preferred shares or preferred stock. Preferred dividends are prioritised over common dividends and are typically set at a predetermined rate or amount. Preferred shareholders receive these dividends before common shareholders, providing them with a higher level of income stability. These dividends are often paid out on a regular basis, such as quarterly, like regular dividends.
Advantages/benefits of paying dividends
Many of the world’s top companies regularly pay out dividends because doing so provides a number of key benefits, including the following:
✔️ Messaging: Paying out dividends sends a strong message of financial solvency to the world at large.
✔️ Stability: Investors prefer the stability of dividends over the possibility of increased rewards from other options, such as capital gains.
✔️ Shareholder happiness: Receiving dividends regularly keeps shareholders happy.
✔️ New investor enticement: Companies that pay dividends are more attractive to investors than those that don’t, especially those interested in long-term wealth.
✔️ Historical performance: Dividend-paying companies tend to outlast companies that do not pay dividends.
✔️ Messaging: Paying out dividends sends a strong message of financial solvency to the world at large.
✔️ Stability: Investors prefer the stability of dividends over the possibility of increased rewards from other options, such as capital gains.
✔️ Shareholder happiness: Receiving dividends regularly keeps shareholders happy.
✔️ New investor enticement: Companies that pay dividends are more attractive to investors than those that don’t, especially those interested in long-term wealth.
✔️ Historical performance: Dividend-paying companies tend to outlast companies that do not pay dividends.
Disadvantages/drawbacks of paying dividends
While paying dividends is a powerful play for management, it also comes with some obvious drawbacks:
❌ Loss of funds for growth or investment: Paying out dividends means that money is not reinvested back into the company for further growth.
❌ Clientele effect: This applies when dividends are first paid out. When a drastic change is made to company policy, it can adversely affect the share price. Investors like stability, so adding dividends without a track record of paying them can send out a confusing signal to shareholders.
❌ Requires consistency: Paying dividends sporadically is typically not a winning play; if the company does it once, it needs to be followed through in most of the subsequent years.
❌ Loss of funds for growth or investment: Paying out dividends means that money is not reinvested back into the company for further growth.
❌ Clientele effect: This applies when dividends are first paid out. When a drastic change is made to company policy, it can adversely affect the share price. Investors like stability, so adding dividends without a track record of paying them can send out a confusing signal to shareholders.
❌ Requires consistency: Paying dividends sporadically is typically not a winning play; if the company does it once, it needs to be followed through in most of the subsequent years.
This is the process by which a company buys back its own shares from the open market (which is why this is also known as a ‘stock buyback’). The company uses its available cash reserves to repurchase outstanding shares, effectively reducing the number of shares in circulation; the shares that are left, according to laws of supply and demand, should be worth more. It is not, strictly speaking, a dividend payment but can have the same effect of increasing shareholder wealth, just indirectly through the share price.
Share repurchasing can be done for various reasons, such as returning excess capital to shareholders, boosting stock prices, or improving earnings per share. The repurchased shares can be retired or held as treasury stock, which can be reissued or cancelled in the future.
Share repurchasing can be done for various reasons, such as returning excess capital to shareholders, boosting stock prices, or improving earnings per share. The repurchased shares can be retired or held as treasury stock, which can be reissued or cancelled in the future.
The difference between dividends and stock buybacks
Dividends and share buybacks are similar in that both allow companies to distribute excess profits to their shareholders. Dividends are a direct distribution of profits to shareholders, whereas share buybacks involve a company repurchasing its own outstanding shares from the open market, reducing the number of shares in circulation and thus raising the price per share and, in turn, the earnings per share.
As the chart below shows, dividends tend to be relied upon by companies over time, whereas buybacks go in and out of fashion—usually based on market conditions.
As the chart below shows, dividends tend to be relied upon by companies over time, whereas buybacks go in and out of fashion—usually based on market conditions.
Source: ProShares. Past performance doesn’t guarantee future results.QUOTE
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine”
The key difference between dividends and share buybacks lies in the manner in which the excess profits are distributed. Dividends involve direct disbursements to shareholders based on their shareholding, while share buybacks involve the company repurchasing its own shares from the open market.
While both methods provide a means for returning profits to shareholders, they have different implications for the company's capital structure, earnings per share, and shareholder equity.
While both methods provide a means for returning profits to shareholders, they have different implications for the company's capital structure, earnings per share, and shareholder equity.
Key takeaway
Despite having quite a lot of confusing terminology associated with them, dividend payments are quite simple. You can easily check the DPS for a given company to see what you can make in a given year, and many online calculators are available to assist with financial projections.
By investing via Trading 212, you can select large-cap companies that pay dividends and set them up for automatic reinvestments.
While there are many forms of dividend payments, the most common are cash and stock, which are automatically added to your trading account balance or reinvested. Remember that (in the UK) the first £1,000 of your dividends are also tax-free as an added incentive.
By investing via Trading 212, you can select large-cap companies that pay dividends and set them up for automatic reinvestments.
While there are many forms of dividend payments, the most common are cash and stock, which are automatically added to your trading account balance or reinvested. Remember that (in the UK) the first £1,000 of your dividends are also tax-free as an added incentive.
FAQ
Q: How are dividends paid in the UK?
The process typically involves a declaration by the company's board of directors, which determines the amount to be paid per share. Dividends are usually paid in cash, directly to shareholders' bank accounts, or via checks.
The company's dividend payment date is set in advance, and shareholders must be on the company's register as of a specific date, known as the ‘record date’, to be eligible for the payment. The payment process is handled by the company's registrars or through electronic systems, ensuring that shareholders receive their dividends promptly.
The company's dividend payment date is set in advance, and shareholders must be on the company's register as of a specific date, known as the ‘record date’, to be eligible for the payment. The payment process is handled by the company's registrars or through electronic systems, ensuring that shareholders receive their dividends promptly.
Q: What are the different types of dividends?
Different forms of dividend payments include:
1. Cash dividends: Profits distributed to shareholders in the form of cash payments, providing regular income.
2. Stock dividends: Additional shares distributed to shareholders proportionate to their holdings, increasing their ownership stake.
3. Liquidating dividends: Distribution of assets made by a company when liquidating or winding up its operations.
4. Special dividends: One-time payments declared when the company has excess cash/profits beyond regular distributions.
5. Property dividends: Distribution of physical assets or investments instead of cash or shares.
6. Scrip dividends: Option for shareholders to receive additional shares instead of cash, with new shares issued based on existing holdings.
7. Preferred dividends: Fixed, regular payments made to holders of preferred shares before common shareholders.
In the UK, there are two primary types of stock dividends: interim dividends and final dividends. Interim dividends are paid during the financial year before the company's annual financial statements are prepared. Final dividends are paid after the company's financial year-end and reflect the final profits for that period.
1. Cash dividends: Profits distributed to shareholders in the form of cash payments, providing regular income.
2. Stock dividends: Additional shares distributed to shareholders proportionate to their holdings, increasing their ownership stake.
3. Liquidating dividends: Distribution of assets made by a company when liquidating or winding up its operations.
4. Special dividends: One-time payments declared when the company has excess cash/profits beyond regular distributions.
5. Property dividends: Distribution of physical assets or investments instead of cash or shares.
6. Scrip dividends: Option for shareholders to receive additional shares instead of cash, with new shares issued based on existing holdings.
7. Preferred dividends: Fixed, regular payments made to holders of preferred shares before common shareholders.
In the UK, there are two primary types of stock dividends: interim dividends and final dividends. Interim dividends are paid during the financial year before the company's annual financial statements are prepared. Final dividends are paid after the company's financial year-end and reflect the final profits for that period.
Q: Do you have to pay tax on dividends?
Yes, you will pay tax on dividends. Dividend tax is calculated based on your total dividend income, and in the UK, it falls into different tax bands: 8.75% at the basic rate, 33.75% at the higher rate, and 39.35% at the additional rate.
However, you also have a tax-free dividend allowance. While up to £5,000 was tax-free in 2017, the rate has now gone down to £1,000 and will be only £500 from April 2024 onwards.
However, you also have a tax-free dividend allowance. While up to £5,000 was tax-free in 2017, the rate has now gone down to £1,000 and will be only £500 from April 2024 onwards.
Q: What type of dividend is best?
The "best" form of dividend is the one that best fits the situation at hand, as well as personal circumstances and preferences. Cash dividends provide immediate income, stock dividends increase ownership stake, special dividends offer one-time larger payments, property dividends distribute assets, scrip dividends provide an option for additional shares, and preferred dividends offer stability. The choice depends on factors like income needs, long-term investment goals, and individual preferences.
Q: How often are dividends paid?
Each company determines the frequency of its dividend payments, but they are typically paid quarterly. Some companies choose to distribute dividends twice a year, while others opt for a single annual payment.
The timing of dividend payments is usually disclosed by the company in its financial statements or through announcements to shareholders. Shareholders should refer to the company's dividend policy and monitor relevant updates to determine the specific frequency of dividend payments for each company in which they hold shares.
The timing of dividend payments is usually disclosed by the company in its financial statements or through announcements to shareholders. Shareholders should refer to the company's dividend policy and monitor relevant updates to determine the specific frequency of dividend payments for each company in which they hold shares.
Q: How are dividends distributed to shareholders?
Dividends are distributed to shareholders through various methods. Typically, companies pay dividends in cash directly to shareholders' bank accounts. This can be facilitated through electronic transfers or checks issued to shareholders. The company's registrars or designated financial institutions handle the payment process.
The company sets a dividend payment date, called the record date. Once it arrives, eligible shareholders receive their dividend distribution as per their shareholding in the company. Shareholders must ensure that they are on the company's register as of the record date to be eligible for the dividend payment.
The company sets a dividend payment date, called the record date. Once it arrives, eligible shareholders receive their dividend distribution as per their shareholding in the company. Shareholders must ensure that they are on the company's register as of the record date to be eligible for the dividend payment.
Q: What is the impact of dividend payouts on stock prices?
In general, dividend payments are seen as a positive signal by investors, indicating that the company is generating profits and has the financial stability to distribute a portion of them to shareholders. This can lead to increased investor confidence and potentially attract more investors, which can drive up demand for the stock and, in turn, increase its price.
However, the effect on stock price may also depend on other factors, such as market conditions, investor expectations, and the overall financial health and growth prospects of the company. Additionally, some investors may prefer dividend-paying stocks for their regular income stream, which can also influence demand and stock price.
However, the effect on stock price may also depend on other factors, such as market conditions, investor expectations, and the overall financial health and growth prospects of the company. Additionally, some investors may prefer dividend-paying stocks for their regular income stream, which can also influence demand and stock price.
