Written byA dividend is a payment a company makes to its shareholders, usually out of profits, paid as cash or as extra shares.
Also known as: dividends, share dividend, distribution
Key points
- A dividend is discretionary until the directors declare it, so it can be cut or skipped in a tough year without breaching any obligation.
- Most listed companies pay an interim and a final dividend each year, set as cents per share on a declared record date.
- Australian dividends are often franked, meaning company tax has already been paid on the profit and a credit comes with the payment.
- You can take a dividend as cash or reinvest it into more shares through a dividend reinvestment plan, which builds your portfolio.
- Dividends are income, so they go in your tax return and are taxed at your marginal rate.
How dividends work
A company's directors decide how much profit to pay out and how much to keep in the business. When they declare a dividend, they set an amount per share and a record date. If you own the shares on that date, the payment lands in your bank account, or buys more shares, a few weeks later.
Not every company pays one. Younger businesses often reinvest all their profit to grow, while mature banks, miners and retailers tend to pay out a steady share of earnings. The ATO treats dividends as assessable income, so they belong in your tax return for the year you receive them.
Franked and unfranked dividends
A franked dividend carries a credit for company tax the business has already paid on that profit. You declare the cash dividend plus the credit as income, then use the credit against your own tax bill. If the credit is larger than the tax owed, the surplus can come back as a refund.
An unfranked dividend carries no credit, usually because the profit was earned overseas or was not taxed in Australia. Partly franked dividends sit in between. Your annual dividend statement shows the split, and the franking percentage can change from one payment to the next.
What dividends mean for your money
Dividend income is one of two ways shares pay off, the other being a rise in the share price. Income investors and retirees often favour shares with a long record of steady payments, because the cash arrives without having to sell anything.
Dividends are not fixed income though. A company under pressure can halve or scrap a payment, and the share price often falls with it. Australian lenders also treat dividend income cautiously and usually want a consistent history before counting it towards a home loan, so ask how your lender assesses it.
Example
Sam owns 2,000 shares in an Australian bank. The bank declares a fully franked interim dividend of 80 cents per share, so Sam is entitled to $1,600 plus the franking credits attached to that payment. Sam declares both the cash and the credits in the tax return, and the credits reduce the tax payable on the total. Because Sam has a dividend reinvestment plan switched on, the $1,600 buys more bank shares instead of landing in the bank account.
Not to be confused with
- Interest
- interest is owed to a lender under a contract, while a dividend is discretionary and only paid to shareholders out of profit
Frequently asked questions
What is a dividend in simple terms?
It is your share of a company's profit. If you own shares and the directors decide to pay out some of the year's earnings, you receive an amount for every share you hold. You can take it as cash or use it to buy more shares.
How often are dividends paid in Australia?
Most listed Australian companies pay twice a year: an interim dividend after the half-year results and a final dividend after the full-year results. Some pay quarterly, some add a special dividend after a one-off gain, and plenty of smaller companies pay nothing at all.
Do I pay tax on dividends?
Yes. Dividends are assessable income and go in your tax return for the year you receive them. Franking credits attached to Australian dividends are declared as well, then offset the tax owed, and excess credits can be refunded. Check your circumstances with the ATO or your accountant.
What is the difference between a dividend and a capital gain?
A dividend is cash the company hands you out of profit while you still hold the shares. A capital gain is the profit you make when you sell the shares for more than you paid for them. Both are taxable, but they are taxed under different rules.
Can a company stop paying dividends?
Yes. A dividend is a decision, not a debt, so directors can cut or skip it when profits fall or the cash is needed elsewhere. That is why dividend income can drop suddenly, and why investors look at how steady a company's payments have been.
Related terms
Shareholder
A shareholder is a person or entity that owns shares in a company, giving them a share of its profits and value while the directors run the business.
Read definitionCompany
A company is a separate legal entity, formed under the Corporations Act 2001, that can own property, borrow and be sued in its own name, independently of its shareholders.
Read definitionPortfolio
A portfolio is a grouped set of loans, leases and the assets behind them, held by one lender or lessor and managed together for reporting, risk and performance.
Read definitionATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionFranking credits
Franking credits are tax credits attached to Australian dividends that pass on company tax already paid, so shareholders are not taxed twice on the same profit.
Read definitionPty Ltd company
A Pty Ltd company is a private company with its own legal identity that cannot offer shares to the public and limits shareholders' liability to their share capital.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.