Dividend on shares: why is it paid and how often is it paid?

What is a dividend?

A dividend is a profit that a shareholder receives as a return on his investment in the company. When someone buys shares in a company, he becomes one of the owners of that company (however tiny that ownership might be). And if the company does well (in terms of profit, etc), it pays the shareholder with a portion of the profit in the form of dividends.

How much dividend is paid?

It depends on the factors such as the number of shares the investor holds, frequency of dividend payments, amounts of dividend, etc.

Do all companies pay dividends?

No. Some companies pay and some not. It all depends on profitability and affordability. Paying dividends is not compulsory.

Whether a company will pay dividends or not depends on if the company has a healthy financial standing (i.e. is making a profit), or has the means to pay. A company running into heavy debt (such as Lloyds Banking Group which had to be bailed out by the UK government in the recent recession) is very unlikely to pay dividends until it comes back in profit.

How many times a year companies pay dividends?

Some companies pay dividends just once a year and some pay up to four times. Admiral Group Plc, which is a UK insurance company listed on FTSE 100 market, has paid 3 dividends amount totalling 73.8 pence per share so far at the time of writing this article (Sep 2014) whereas Lloyds Banking Group has not paid any dividend at all in 2014. 

What is the ex-dividend date? 

It is the date on which, if you hold the shares, you will become eligible to receive dividends. However, if you buy shares on this date, you WILL NOT be entitled to dividends (hence the name “ex-dividend”). 

To simplify it, let’s say a company called ABC Inc is going to pay a 30p dividend per share and the ex-dividend date is 22 October 2019. “A” has held shares in ABC Inc for a while but sells them on 21 October 2014; he will NOT be entitled to dividends as he sells them one day before the shares become eligible for dividends. 

But “B” who buys on 21 October 2014 and keeps them past 22 October 2014 and sells them on 27 October 2014 (25 and 26 are weekend), will be eligible for dividend as he held the company’s shares on the ex-dividend date. So it is important that an investor does not sell his holding before the ex-dividend date has passed. It is equally important that the holding is not sold before the Record date either.

Record date:

It is the date when the dividend-paying company “records” the names of shareholders who are entitled to the dividend payment. The record date is normally a day after the ex-dividend date and a holder must hold shares on the record date to receive the dividend.

Tax on dividends:

There is an allowance of £2000 for the tax year 2020-2021 which means you don’t pay any tax on income from dividend if the amount is less than £2000. Any dividend income above £2000 will incur a tax rate ranging from 7.5% to 38.1% depending upon your total income. For further details see Tax on dividends