What are dividends?

When a company makes a profit it can choose to either retain some of it for future expansion or it can make a dividend payment to shareholders.

A dividend is a portion of a company's profit that it decides to pay out to shareholders, in return for their investment.

Many companies listed on the ASX will elect to pay dividends twice a year, usually referred to as an ‘interim dividend’, paid halfway through their financial year and a ‘final dividend’, paid at the end of their financial year.

Companies are not limited to this and can choose to pay dividends more or less frequently.

A company may not pay a dividend at all if they have failed to make a profit or have chosen to reinvest profit back into the business.

 

When are dividends paid?

Two important dates will decide your eligibility to receive the current dividend - the ex-dividend and the record date.

The record date is 5.00pm on the date a company closes its share register to determine which shareholders are entitled to receive the current dividend. It is the date when all changes to registration details must be finalised.

An ex-dividend date is set at four business days prior to the record date. To be entitled to the dividend you must purchase the shares before the ex-dividend date.

If you buy the shares before the ex-dividend date you will be buying them 'cum dividend' which means you will get the current dividend.

Whereas, if you buy shares on or after the ex-dividend date you will miss out on the current dividend. This is why it is wise to check whether a share is trading 'cum' or 'ex-dividend' before you trade.

 

What happens to a company’s share price?

Heightened demand for a share with a dividend attached to it could potentially cause a share price to rise in the lead up to the ex-dividend date.

Similarly, once the ex-dividend date passes, and with all else being equal, the share price may fall by the value of the dividend or thereabouts.

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