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What are dividends?

What are dividends?
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If you are thinking about investing in shares, then it’s worth finding out about dividends. If you’re unsure about what they are, how they are paid and how they are taxed, then read on.

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What are dividends?

They are payments made by a limited company to its shareholders. The money used for dividend payments is profit after all outstanding expenses, liabilities and taxes have been paid.

How much are they?

The amount depends on the company. It is usually decided by the board of directors. It must then be approved by shareholders before it is announced.

If you are a shareholder, the amount you receive will be proportional to the number of shares you own. They are usually expressed in terms of pence per share.

So, if the dividend is 10p per share and you own 10,000 shares, the total payment will be £1,000.

What is the dividend yield?

This is the size of a dividend relative to the share price expressed in percentage terms. So, if a company has a share price of £1 and the dividend is 2p per share, then the dividend yield 2%.

The comparison of dividend yields is a useful way to compare payments from different companies. Buying stocks with high dividend yields is a common strategy used by many investors.

How are they paid?

When purchasing the shares, you usually let the account manager know how you want them paid to you.

Dividends are normally paid into the share dealing account used to buy the shares in the first place. 

Other options available in terms of the payment of dividends can vary.

You can choose to have the cash paid into your bank account, or it can be paid into the share dealing account.

You can also choose to reinvest them. If you select this option, dividends will be paid into your share dealing account and automatically used to purchase more shares of the same company.

When are they paid?

The payment frequency varies depending on the company and is determined by the board of directors. It will be either quarterly or half-yearly.

If you want to know the time of year they are likely to be paid, a good indication will be the dates of previous payments.

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If you are interested in a specific company, you will need to undertake some research if you want to find out about the previous dividend payments. This information can be found in news articles, and some share dealing websites include dividend information.

What are the important dates to remember?

There are four key dates you need to bear in mind:

  • Declaration date – This is the date when the dividend is announced. The board will issue information on the amount (pence per share), record date, and payment date.

  • Record date – You need to be registered as a shareholder in the company records on or before this date. Anyone registered after this date will not receive that payment.

  • Ex-dividend date – This is typically three days after the record date. If you purchase a share on or after the ex-dividend date, you will not be entitled to that payment. This date is determined by the stock exchange.

  • Payment date – This is the date on which they will be paid.

How are dividends taxed?

In the tax year 20/21, you can earn dividends of up to £2,000 tax-free. Any earned above the £2,000 allowance will be subjected to tax depending on your tax band.

  • Basic rate taxpayers pay 7.5%

  • Higher rate taxpayers pay 32.5%

  • Additional rate taxpayers pay 38.1%

Further information on the tax on dividends is available on the gov.uk website.

Take home

Stocks that pay out large dividends are an attractive proposition. However, before investigating any single investment strategy it is a good idea to do some research first.

Payments can change and stop altogether depending on the economic climate. As a result, it’s a good idea to review your investments on a regular basis.

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