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January 10, 2023Dividend investing can be a solid strategy, so it’s worth knowing how dividends work.
What is a dividend?
A dividend is a payment made by a company to its shareholders. Dividends are usually paid at a specific frequency—quarterly, semi-annually, or yearly. The size and payment of a dividend is determined by a company’s board of directors.
Dividends may be paid in cash, or in the form of company shares. Investors may also be offered a choice of cash or shares. Companies are not obligated to pay a dividend and can reduce the dividend or stop paying it at any time.
A common metric used to determine the relative size of the dividend is the dividend yield. This is calculated by dividing the dividend share by the share price of the company, expressed as a percentage. For example, if a dividend of R1 is declared and a company share is trading at R25, the dividend yield is 4%.
If a shareholder (that is a trader or investor) owns shares on the ‘last day to trade’ dividend date or earlier, they are eligible to receive that specific dividend.
Dividend dates
Traders and investors should pay attention to the following dates when it comes to dividend payments.
Declaration date
The declaration date is the date on which the board of directors announces the planned payment of a dividend. The announcement will include the size of the dividend and an outline of other important dates relating to the dividend payment.
Last day to trade date
A share is cum dividend, which means ‘with dividend’, when a company has declared that there will be a dividend paid in future. A share will trade cum dividend until the ex-dividend date. After that, the share trades without its dividend rights.
The last day to trade is usually the day before the ex-dividend date. This means that if the share is bought on that date, the new shareholder will still receive the dividend payment.
Ex-dividend date
The first day that a share trades without a dividend. Purchasers of shares on or after the ex-dividend date are not entitled to a dividend. In many cases, the share price may fall in line with the dividend declared.
Record date
The date on which the trader or investor must be listed as a company shareholder to receive the dividend. The record date is commonly confused with the ex-dividend date. However, the ex-dividend date is earlier than the record date, since there is a settlement period for share trades on exchanges.
Payment date
The date on which the dividend is paid to shareholders. Dividend payments are electronically transferred to the accounts of shareholders.
Example
Sasol Ltd (SOL) declared a gross dividend of R14.70 as a final dividend for the year ending June 2022.
- Declaration date: 23 August 2022.
- Last trading day to qualify for and participate in the dividend (cum dividend): 6 September 2022.
- Date that trading ex-dividend commences: 7 September 2022.
- Record date: 9 September 2022.
- Payment date (electronic and certificated register): 12 September 2022.
Gross and net dividend
A company will declare a dividend in the format of a gross number. The South African dividends tax rate is 20%.
In the example of the Sasol Ltd (SOL) dividend of R14.70 above, the net dividend amount will then be R11.76 (R14.70 – 20%).
Shareholders who do not qualify for exemption from dividends tax (e.g., non-profit organisations) will only receive the net amount of R11.76.
Reinvesting dividends
In certain cases, instead of receiving dividends as cash, you may also opt for an automatic dividend reinvestment plan, or DRIP. With a DRIP, dividends are automatically used to purchase additional shares in the company. This allows traders and investors to accumulate more shares over time and can potentially compound returns but also increases portfolio risk.
Dividend investment strategy
Dividend investing can be a solid investment strategy. Dividend-paying shares have historically outperformed some of the major equity indices and are often less volatile.
This is because dividend-paying shares provide two sources of return—regular income from dividend payments, and the capital appreciation of the share price.
WRITTEN BY PEET SERFONTEIN
Peet Serfontein is an independent analyst with over 20 years of financial markets experience in market analysis, trading strategies, and investment research.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)