OpenMarkets Education

Dividends explained

When a company earns profits from its operations, it can either reinvest them to create further profits and share price appreciation, or distribute a portion to shareholders as dividends.

A dividend is a cash payment made to shareholders from a company’s profits. Dividends are allocated on a per share basis and generally comprise an interim and final dividend each year.

Most companies offer two options for receiving dividends:
> paid as cash via a direct deposit into a nominated bank account
> reinvestment into shares in the company, otherwise known as a dividend reinvestment scheme.

Australian investors must include dividends as income for tax purposes. Dividends are issued as franked or unfranked. A franked dividend is one that’s issued with an imputation or franking credit attached; this can reduce or eliminate the tax liability.

When looking at shares, you may see the following pre-fixes used:

Cum – means with
> A cum-dividend share price includes the dividend. An investor who buys a share cum-dividend is entitled to the current dividend.
> A security that is cum-interest means the buyer is entitled to the next interest payment.

Ex – means without
> An ex-dividend share price excludes the dividend – it is retained by the seller.
> The ex-date is the date at which shares change from being quoted ‘cum’ to ‘ex’.

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