Dividends are payments made by a company to its shareholders from its earnings or reserves. They allow investors to share in the company's profits. Dividends are usually paid in cash but can also be given as additional shares. Companies can pay cash dividends even if they make a loss, to show confidence in their future financial performance. Regular dividend payments can attract and retain shareholders. Dividends are declared on a 'per-share' basis, so the more shares you own, the more dividends you receive.
Like individual stocks, some ETFs pay ‘distributions’. If the underlying companies that an ETF holds pay dividends, these are paid directly into the fund. Distributions are the collection of all forms of income that the ETF makes, including:
Generally, companies make decisions on dividend payments when issuing the latest financial accounts. For large companies this is typically twice a year, but real estate investment trusts (REITS) may pay returns four times a year. Sometimes, as an added bonus for shareholders, a company can declare a special dividend. This may occur when the company has sold assets or made non-recurring or windfall profits, and the Board determines that shareholders can receive a share of the gains.
Companies don’t have to pay dividends – the company’s Board makes a strategic decision on the best use of retained earnings or reserves. For instance, the company may instead wish to pay down debt, reinvest the funds back into the business or hold funds in reserves with the possibility of engaging in future mergers or acquisitions.
Dividend Reinvestment Plans (DRPs) allow shareholders to reinvest all or part of any dividend paid on their shares in additional shares instead of receiving the dividend in cash. Some shareholders seek cash dividends to maintain their lifestyles, while others may prefer to reinvest the dividend in shares, as they maintain a positive outlook for the company.
Key dividend payment dates include:
Higher returns come with higher risks.
If you have more time to invest, it increases your portfolio’s risk tolerance.
Consider how much risk your entire portfolio is exposed to.
Don’t invest more than you can afford to lose.
Declaration date
When the company announces a dividend
Ex-dividend date
The trading date before which you must purchase the company’s shares to receive the dividend.
Record date
The day after the ex-dividend date, when the company checks its records to identify shareholders.
Payment date
When the dividend gets paid to shareholders. In practical terms, when a company trades ex-dividend, its share price is likely to fall by the dividend amount because investors who buy shares after the ex-dividend date are ineligible for the dividend payment.
CommSec Learn is intended to provide general information of an educational nature only. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Investing carries risk.
