Stake Academy AUS: Dividends
Did you know there are three kinds of dividends? Dive into our dividends edition of Stake Academy for a crash course in dividends.
One of the greatest perks of investing is the chance to become a part-owner in any listed company. This is more significant than it may appear on the surface. As an owner, you may also be entitled to a slice of profits in the form of dividends.
To Share Or Not To Share
Now you’re probably asking, why would a company want to forego their profits and hand back cash to thousands of investors. Companies mostly pay dividends to shareholders to reward the risk they take in investing in their stock.
At times, companies still make dividend payments even when they don’t see growth in their profits. They may do so to maintain their established track record of making regular dividend payments. Still, companies must pay dividends directly from profits in Australia, although this is not a requirement in other countries like the United States.
Breaking Through The Dividend Jargon
Before we continue, it’s important to explain a few of the key terms that are commonly associated with dividends:
|Dividend announcement date||The date management confirms the dividend amount|
|Ex-dividend date||If you purchase the stock on or after this date you are not entitled to the dividend|
|Dividend payment date||The date the dividend is paid (the payment may take a few days to clear)|
|Dividend yield||The percentage of the share price paid out over the last 12-months|
Show Me The Dividends
The most common form of a dividend is a cash payment. The dividend will appear as cash to be withdrawn, reinvested or held in your Stake account.
Still, dividends aren’t always paid in cash; some are paid in scrip. A scrip payment involves the issuance to shareholders of new shares in what is known as a scrip dividend.
A scrip dividend is often used by companies looking to preserve cash but still share profits with shareholders. For example, if a company needs to preserve cash for an expansion, shareholders are more likely to be satisfied if the dividend is replaced with scrip. Still, scrip dividends are far more common in the U.S. and UK than in Australia.
Lastly, a Dividend Reinvestment Program (DRIP) allows investors to reinvest a cash payment directly into shares. While this plan is usually run through the individual company, it’s on Stake’s road map to launch DRIP investing!
There’s Nothing More Certain Than Taxes
Now that we know the three types of dividends let’s briefly explain how they are taxed. Cash dividends are classified as income and are taxed under your income tax rate. Since you receive the cash first with a DRIP, they are also taxed as income.
A benefit of scrip shares is they are taxed as capital gains, not income. While scrip dividends are not eligible for franking credits (more on that soon), you can delay the tax hit until the shares are sold.
We hope we have answered most of your basic dividend questions. Remember to check out our other Stake Academy posts for more helpful information and tips!