Dividends are the distributions that are paid using profits companies made during the year - it is like a reward to investors who have chosen correctly. Dividends are expressed as cents per share. If a company paid 0.30 cents per share and you held 300 shares, it means you will receive $90 in dividends.
Not all companies pay a dividend and before you invest in a share, you should look at their dividend payout history. The amount of the dividend depends on a number of factors, but generally, if they do not have a profit making year, they are unlikely to pay a dividend.
Dividends are usually paid out twice a year, an ‘interim dividend’ and a ‘final dividend’. The interim dividend is usually announced at the release of half year results, while the final dividend is announced at the release of the full year results. Sometimes, attached to the dividend are franking credits, which means the company has paid the tax on their profit (i.e. your dividend) and that you do not have to pay another tax on it, therefore you get a "franking credit" or a tax credit.
E.g. If your $10 dividend is fully franked, this means there is a $3 credit attached to this, because the company has paid the corporate tax rate of 30% on the profit it has distributed to the shareholders. This means you can use this $3 credit to claim back when you are paying your personal income tax.
So your company has performed well and has paid a dividend. What should you do? There are 2 options:
- Take the dividend. The company will send you a cheque or can deposit the money into your chosen account
- Re-invest the dividend for more shares. You’re effectively buying more shares with your dividends. The benefits of re-investing is that you don’t have to pay brokerage on those extra units and the shares that you buy are at a discount to the market price. This is also called a Dividend Reinvestment Plan (DRIP).
To receive a dividend from a company you need to buy their shares before the ex-dividend date and hold it until the record date. For more about ex-dividend dates and how to ensure the stock you buy receives a dividend, visit the ex-dividend article.
One thing to note is that whether you take the dividend or reinvest it into more shares, you must report the information to the Australian Tax Office (ATO). The ATO treats all dividends as ordinary income and thus, must be disclosed during your yearly tax filings. See the ATO website for specific information about taxation on shares.