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’.