Income investors who depend on dividends to support their lifestyle or for reinvestment are often curious about when dividends are paid. After all, knowing the key dates regarding shareholder payouts can help make more informed buying and selling decisions.
What are dividends?
Companies constantly evaluate internal investing opportunities to expand market share through various projects. However, not every project is a worthwhile venture. And it’s possible for a firm’s operations to generate cash flow beyond what can be reinvested effectively.
In these scenarios, companies often return the excess capital to shareholders. And one of the most popular methods is paying a dividend. Investors receive a specified amount of money per share. As such, the more shares an individual owns, the larger their claim on any announced or scheduled payments.
It’s also worth mentioning that another popular method of returning capital to equity investors is share buybacks.
How often are dividends paid?
Each individual company ultimately decides the timing of dividend payments. Unlike bonds which have a fixed payment interval, a firm is not legally required to pay dividends to shareholders. As such, the timing of shareholder payouts between companies is almost always different.
Firms can pay on a monthly, quarterly, bi-annual, or annual basis. Or if a business is issuing a special dividend, it could be at any time during the year. Additionally, while uncommon, a stock has the right to change its payment schedule at any time. However, for the majority of income stocks, paying quarterly is usually the most common.
What are the key dates for dividends?
Whenever a shareholder payment is announced, there are four special dates investors need to understand.
- Declaration Date – This is when the board of directors formally announces a dividend is being issued for a specified period.
- Ex-Dividend Date – This is effectively a cut-off date. Any investor that buys shares in an income stock on or after the ex-dividend date is not entitled to the upcoming dividend payment. However, they will be entitled to any future payments announced thereafter, providing they continue to hold the shares.
- Record Date – This is typically set one day after the Ex-Dividend date. Any investor holding shares on the record date will be entitled to the upcoming dividend payment, provided they bought their shares before the Ex-Dividend date.
- Payment Date – This is when dividends are paid to qualifying shareholders and is usually set 30 days after the Record Date.
How are dividends paid?
Typically dividends are paid as cash credited to investors’ brokerage accounts. However, there are actually four different methods by which shareholder payouts can be delivered.
- Cash Dividends – This is the most common method of returning excess cash to shareholders. Earnings returned to shareholders are paid directly to shareholders’ investment accounts or by checks in the mail.
- Stock Dividends – In some instances, a firm might be short on liquid cash and instead issue additional shares whose value is equivalent to the declared amount.
- Spin-Off Dividend – Larger corporations might decide to spin off some of their operations into their own independent entities. In these situations, it’s not uncommon for investors to receive shares of the newly formed company.
- Special Dividend – Not every business pays a regular dividend. A firm may come across a cash windfall from the sale of an asset or non-core operation. In this situation, a company may return some or all of the proceeds to shareholders in a one-time payment.
What are the three types of dividend policy?
A company’s dividend policy is primarily designed at the discretion of the Board of Directors. And every business can choose its own methods and requirements for redistributing excess earnings to shareholders. However, generally speaking, a policy can be placed into one of three categories.
- Stable – The company seeks to provide a stable dividend payout even during short-term periods of operational volatility. In the United States and the United Kingdom, this is the most common type of policy as it creates reliability in the eyes of investors.
- Constant – Instead of keeping payments stable, a firm may choose to redistribute a constant percentage of earnings each year. This means dividends often see significant growth during years of higher profits but significantly decline during bad years. This introduces cyclicality that not every investor is comfortable with. However, it also reduces the risk of firms over-extending themselves financially during challenging operating periods. The Constant dividend policy is widely used throughout the European markets.
- Residual – This policy does not aim to provide any form of reliability or consistency. A firm will merely return any excess capital after covering capital expenditure and working capital requirements. While more uncommon, Residual dividend policies provide more financial flexibility for management teams at the expense of reliability.
What is a Dividend Reinvestment Plan (DRIP)?
A Dividend Reinvestment Plan, or DRIP, is a program that allows investors to reinvest any cash dividend received automatically. The intention is to maximise the power of compounding. A shareholder that reinvests their dividends end up with more shares. Subsequently, the next time a payment is issued, they are entitled to even more dividends, creating a wealth-building loop that continues to accelerate over time.
Some companies offer DRIPs directly, bypassing the need for a broker and eliminating any trading costs in the process. What’s more, some firms even offer small discounts of 1% to 10% on shares that are purchased through DRIPs, amplifying the wealth-building effect even further.
Are dividends taxable?
The tax treatment of dividends ultimately depends on the country where the investor resides. But here in the UK, dividends are treated as a form of income and therefore are taxable. Even if payments are automatically reinvested using a DRIP or brokerage account feature, the gains are still subject to tax.
However, UK investors are granted a dividend allowance of up to £1,000 as of April 2023. This dividend allowance is scheduled to drop to £500 as of April 2024 and may change again in the future.
The exception is stock dividends. If a firm issues shares instead of cash, this does not count as personal income, and therefore no tax needs to be paid. However, when an investor eventually sells the received shares, they will be subject to capital gains tax on the date of sale.
Fortunately, British Investors can leverage the power of tax-efficient investment accounts such as the Stocks and Shares ISA. By investing in an ISA, all capital gains and dividends received on investments are tax-free.
The bottom line
How often dividends are paid depends on the individual company. It ranges from as much as 12 times a year to once a year. These shareholder payouts could come in the form of cash or stocks. Interestingly, some companies offer a reinvestment plan that allows investors to automatically use their earnings from it to buy additional stocks of the company.
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This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.