Dividend:
The two main ways to make money on the stock market are through trading and dividends. Trading is making money through the actual buying and selling of shares (The Buy Low Sell High philosophy) or through dividends.
Dividends are the payment paid by a company to its shareholders, it is paid as a fixed amount per share the more shares you have the more the payment. There are a few dates you need to keep in mind when thinking about divdends which are:
Dates:
The Results Date/Declaration Date: The results date is the day that the company announces its earnings and normally with in the many pages of results is the amount of the dividend. after a publicly traded company announces a dividend it is now a liability on its books and the company legally owes the payment to the shareholders.
Ex-Dividend Date: The Ex Dividend Date is the date at which dividends will no longer be received by the new owner in the case of a sale. A share sold before the Ex-Div Date will pay the dividend to the new owner where as a share sold on the Ex-Div date will pay the dividend to the old owner. for this reason a share price will normally go up on the results date by the amount of the dividend and will go down by the rate of the dividend on the Ex-Div date.
Record Date: The Record date is the date at which all shareholders must be recorded in order to receive the Dividend payment. In most modern exchanges the registration is automatic so this date is not as important.
Payment Date: the final date in the process is the Payment Date, This is the date that you will actually receive your payment. If you hold your shares in paper form then this is the day the cheque will be mailed, if you receive your payments electronically then you should actually receive them on this date.
Dividend Ratios:
Dividends feature several key metrics that should be looked at when deciding on a dividend focused investment, these include Dividend Yield, Dividend Cover and Dividend Growth.
Dividend Yield: The Dividend Yield is the Annual Dividend as a Percentage of Share Price, Essentially this is used to calculate how good an investment one share is against the other, If a share was 100p with a yield of 3% then you would receive a payment of 3p per share. If a share was £100 with the same yield then you would receive £3 per share. So if you were investing £500 then the two investments would be identical in value despite the difference in Share Prices.
Dividend Cover: The dividend cover is the amount of times that a company could cover the dividend with profits. The average dividend cover is 2 meaning that the companies earnings per share (Company profit / number of shares) is twice the dividend. Some industries operate with a lower dividend cover than others and it is generally a reflection of the maturity of the company and the need for contingency funds. If a company has a dividend cover of less than 1 then it means that the Dividend is more than the profit made and so the dividend is being covered by reserve funds. In this case the Dividend will be unsustainable unless trading conditions change.
Dividend Growth: The dividend growth is the rate at which the dividend is grown each year, this growth is important for people who are using their dividends to live off as the dividends need to grow at a faster rate than inflation in order to provide the same (or greater) level of spending power.
Dividend Taxes:
Dividend income is taxed as income in the UK but is taxed at lower rates of 10%, 35% and 40.5% depending on if you are a Basic, Higher or Additional Rate Tax Payer. However as the money paid as dividends has already had tax paid on it as corporation tax then there is considered a 10% tax paid before the dividend is received so the amount to be paid is therefore 0% for Basic Rate (20%) tax payers, 25% for Higher Rate (40%) and 30.5% for Additional Rates (45%). Dividend Tax that is payable needs to be completed on a self assessment form. If you hold your Shares in an ISA or SIP then there are no taxes due on the dividend income.
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