Learning Objectives

After completing this chapter, you will be able to:

• Understand what dividends are.
• Learn how Dividend Yield is calculated.
• Understand what franking credits are.
• Learn the difference between fully franked and partially franked dividends.
• Understand Ex-Dividend and Record Dates.
• Learn why dividend dates are important for Australian investors.

Introduction

Many Australian companies reward shareholders by paying dividends. In Australia, investors may also receive an additional tax benefit through franking credits, making dividends an important part of many investment strategies. Understanding how dividends and franking credits work can help investors make more informed decisions when investing in ASX-listed companies.

What are Dividends?

A dividend is a portion of a company's profits that is distributed to shareholders.

Companies usually pay dividends after earning profits, although the amount and frequency can vary depending on the company's financial performance.

Not all companies pay dividends. Some choose to reinvest their profits back into the business to support future growth.

Why Do Companies Pay Dividends?

Companies may pay dividends to:

• Reward shareholders.
• Share a portion of company profits.
• Attract long-term investors.
• Demonstrate financial strength.
• Build investor confidence.

Established companies with stable earnings are generally more likely to pay regular dividends.

Types of Dividends

Australian companies commonly pay:

Interim Dividend

• Paid during the financial year.
• Usually based on half-year financial results.
• Provides shareholders with income before the financial year ends.

Final Dividend

• Paid after the end of the financial year.
• Usually approved after annual financial results are announced.
• Often larger than the interim dividend.

Special Dividend

• A one-time dividend.
• Usually paid when a company has excess cash or receives significant profits from a special event.

What is Dividend Yield?

Dividend Yield measures the annual dividend income an investor receives relative to the current share price.

It helps investors compare dividend-paying companies.

Formula

Dividend Yield = Annual Dividend Per Share ÷ Share Price × 100

Example

A company pays:

• Annual Dividend = $2.00 per share
• Current Share Price = $40

Dividend Yield:

($2.00 ÷ $40) × 100 = 5%

This means the annual dividend equals 5% of the current share price, excluding any share price movements.

What are Franking Credits?

Franking credits are a unique feature of Australia's tax system.

They are designed to reduce double taxation on company profits.

When an Australian company pays company tax and then distributes profits as dividends, shareholders may receive a franking credit representing the tax already paid by the company.

Depending on an investor's individual tax circumstances, these credits may reduce the amount of tax payable or, in some cases, result in a tax refund. Tax outcomes vary, so investors should seek professional tax advice where appropriate.

Fully Franked vs Partially Franked Dividends

Fully Franked Dividend

A fully franked dividend means the company has already paid tax on all the profits distributed as dividends.

Benefits may include:

• Tax credits attached to the dividend.
• Reduced double taxation.
• Greater appeal for many Australian investors.

Partially Franked Dividend

A partially franked dividend means only part of the dividend has tax credits attached.

The remaining portion is paid without full franking credits.

Unfranked Dividend

Some companies pay unfranked dividends.

This means:

• No franking credits are attached.
• Investors generally receive only the cash dividend.

Important Dividend Dates

When investing for dividends, there are several important dates to understand.

Declaration Date

The Declaration Date is when the company announces:

• The dividend amount.
• Whether it is fully or partially franked.
• The Ex-Dividend Date.
• The Record Date.
• The Payment Date.

Ex-Dividend Date

The Ex-Dividend Date is one of the most important dates for investors.

If you purchase shares before the Ex-Dividend Date, you are generally eligible to receive the upcoming dividend.

If you buy shares on or after the Ex-Dividend Date, you generally will not receive that dividend.

Record Date

The Record Date is when the company checks its shareholder register.

Only investors recorded as shareholders by this date are generally eligible to receive the dividend.

Payment Date

The Payment Date is when the dividend is actually paid to eligible shareholders.

Payment is usually made directly to the shareholder's nominated bank account or through their chosen dividend payment method.

Example of a Dividend Timeline

If an investor purchases shares before 10 August, they would generally be eligible for the upcoming dividend.

If they purchase shares on or after 10 August, they would generally not receive that dividend.

Reading a Real ASX Example

Let's look at a simplified example using Commonwealth Bank of Australia (CBA).

When reviewing CBA's dividend information, investors often examine:

• Dividend Yield.
• Dividend history.
• Franking percentage.
• Ex-Dividend Date.
• Record Date.
• Payment Date.

Looking at these details helps investors understand both the potential income and the timing of dividend payments.

Why Understanding Dividends Matters

Understanding dividends helps investors answer questions such as:

• Does the company regularly pay dividends?
• Is the Dividend Yield attractive?
• Are the dividends fully franked?
• When do I need to own the shares to receive the dividend?
• Is the company's dividend history consistent?

Knowing the answers to these questions can help investors plan income-focused investment strategies more effectively.

Key Takeaways

• Dividends are payments made from a company's profits to shareholders.
• Dividend Yield measures annual dividend income relative to the share price.
• Franking credits help reduce double taxation on company profits in Australia.
• Dividends may be fully franked, partially franked, or unfranked.
• The Ex-Dividend Date determines eligibility for the next dividend.
• The Record Date confirms eligible shareholders.
• Understanding dividend dates is important for income-focused investors.