to dividends from one country to another. Generally speaking, dividends are more significant for shareholders in the UK than in other parts of the world, but the sad truth is that the long-term trend for dividends has been downwards, with the most marked decline occurring in the United States. The importance of dividends is always going to be relative to other factors. For instance, at a time when low rates of interest prevail, like the beginning of the current decade, company dividends will seem comparatively attractive. By contrast, when share prices are rising steeply the attractiveness of the dividend is likely to be overshadowed. This, too, has been the state of affairs in the ten years to 2006 when dividends contributed just 8% of the total return to shareholders from their shareholdings. Changes to the tax regime of the shareholder may make it more advantageous for them to receive entitlements such as return of capital rather than dividends. However, in the UK share dividends are treated more favourably than income derived from other kinds of savings. [14]
Dividend yields
The size of the dividend is the key component of the dividend yield, one of the basic ratios used for evaluating shares and their price.
Dividend cover
A tool for checking how affordable a dividend is by calculating how many times over the company could afford to pay the dividend out of its after-tax profits.
Of course, in the long term every company must be able to afford its dividend and there are no guarantees that a company that has been paying high dividends might not to have to cut the dividend in the face of a drop in profits. Faced with this uncertainty, some investors rely on a company’s dividend history as an indication of management skill and commitment to maintaining or (better still) consistently raising the dividend. [15]
Along with high rate deposit accounts, shares with a high dividend yield are a favourite among those (known as “income investors”) who need to derive an income from their investments.
Dividends – how they work in practice
Normally the announcements of the interim dividend and the final dividend will accompany the publication of half-year results and final results respectively. The following announcement would be typical:
Friday 14th March 2008
“The Board remains confident in the Group’s earnings outlook and has decided to increase the final dividend by 5% to 25p per share. This brings the full year dividend to 39.9p per share, an increase of 5% on that paid for 2006. Going forward, the Board expects to grow the dividend gradually, while continuing to achieve greater dividend cover.”
This would be followed by a timetable for the dividend payment:
Shares quoted ex-dividend [16 – ] 28th March 2008
Record date – 30th March
Final Dividend paid – 21st May
The AGM– 22nd May
Scrip dividends (paper instead of cash)
Whether the word scrip is derived from a scrap of paper or an abbreviation of subscription, the meaning is memorable enough; scrip dividends are an alternative of taking further shares in the company in place of a cash dividend. [17] A client will often be asked to decide as a matter of policy if they wish to receive scrip dividends (if offered) rather than the cash dividend when they first sign up with a stockbroker. However, ongoing arrangements like this are really a time saving convenience for the stock broking service and its clients; as far as the issuing company is concerned the shareholder normally has a choice between taking the scrip shares or the cash dividend. In the language of corporate actions they make an “election”.
Scrip dividends are fairly common but by no means universal. For UK shareholders, receiving a scrip dividend has income tax implications.
Scrip dividends should not be confused with DRIPs (Dividend Reinvestment Plans) – arrangements for shareholders to have their dividend spent on the purchase of more shares in the company. The difference is that shares for a DRIP are bought on the stock market and the (small) charges are deducted to cover stamp duty and dealing costs. Using a DRIP facility is not a corporate action in itself, merely a service provided by some issuers once the dividend payment has been made.
Scrip dividends in practice
Information about an issuer’s policy on scrip dividends is generally available on the issuer’s investor relations website. The issuer will require an instruction from the shareholder to confirm that they wish to receive their dividend in paper form. This could either be in the form of notification from the broker that this shareholder always opts for scrip dividends where they are available or a signed mandate from the investor that they wish this issuer’s dividends in particular to be paid as a scrip dividend.
The ex-dividend date, record date and payment date for the scrip dividend will normally be the same as for the cash dividend.
The scrip dividend is normally calculated by means of a scrip dividend reference price, a divisor applied to the cash dividend entitlement to work out how many shares the cash dividend equates to. The scrip dividend reference price is calculated according to a formula such as the average of the middle market quotations for the issuer’s shares on the five trading days commencing on the ex-dividend date.
Re-invested dividends
Over long time periods investors who can afford to re-invest dividends reap an enormous reward. For example, £100 invested in equities in 1945 would by 2007 have grown to £8511. However, with dividends reinvested, this figure would have been £131,369 – more than 15 times greater.
Performance figures for managed funds are normally on a dividends re-invested basis. [18]
Scrip issues
Otherwise known as a bonus issue or a capitalisation issue, this is the issue of more shares to the shareholders in proportion to their existing shareholdings at no charge. The purpose of a bonus issue is normally to reduce a company’s retained earnings (reserves) in proportion to its share capital. [19]
The effect of a bonus issue on the issuer’s market capitalisation is to leave it (and the value of each shareholders’ holdings) unchanged. The number of shares in issue goes up but the value of each share goes down. Normally, the dividend will be adjusted downwards to give the shares the same dividend yield as before.
For some markets (including the UK) the effect of reducing the price of individual shares can be advantageous as a very high price for shares is thought to put off investors.
In the US a scrip or bonus issue is known as a share split.
Scrip (bonus) issues in practice
A scrip issue will normally be put to the vote
