If you’re invested in or have been paying attention to the ZSE news you would’ve heard a bit of chatter about dividends. Just in case you are not in the know these are a pretty big deal to investors. It’s one of the benefits of owning shares, getting a payout from the profits of a company. I thought it would be great to write a general article on dividends to go with the top 10 dividend-paying companies on the ZSE and the types of dividends articles. We will discuss things you should know about dividends.
As explained before a dividend is a payment made by a company to investors out of past year accumulated profits or current year profits. Shareholding is not completely a passive exercise. Shareholders have the right to vote in major company decisions through Annual General Meetings (AGMs) or Extraordinary General Meetings (EGMs). All this to say it is in the best interests of company management to keep shareholders pleased with them. Paying out dividends is one way of doing this but should obviously not be done to the detriment of the company.
Types of dividend
For a full understanding of the types of dividends, you can read this article that details them. To keep this article short, I will just say we have a cash dividend and dividend in specie. Cash dividends are what they sound like, the company pays money out to shareholders. A dividend in specie is any dividend other than cash and can include property or shares of the company or its subsidiaries. The result is that shareholders receive some sort of value. Dividends are not mandatory in ordinary shares but are in preference shares at a specified percentage.
The div notice
The dividend notice is the document that is used to announce the details of a dividend. By now you should already have surmised that the notice should contain the amount or value of the dividend if it is a cash dividend and detail of the property on offer if it is in specie. That much is correct but there are a few more things that are important for us to note in a dividend notice. Let’s look at them.
Cum div and Ex div
Once a dividend has been announced on a company’s shares they are considered as trading with a dividend or cum dividend. This makes sense because if you buy shares today with a dividend due on them you will also be entitled to the dividend. Don’t worry, stock markets are very efficient places and the market will usually include the dividend prospect in the pricing of the shares. Either way, it is important to remember this factor. Once the dividend is paid shares are considered ex-div or without dividend.
Paying dividends is not a simple exercise. You have a register that has perhaps millions of shareholders and the names can change daily. So to make the process accurate the dividend notice will inform the public of the date on which the names of shareholders to receive dividends will be recorded. This will be noted as the last day trading cum div. At the close of business on this day the names will be recorded and payment will be set in motion for shareholders whose names appear in the register on that date. So to participate in a dividend you must buy the shares by the date mentioned as the last day. In some cases, they may inform you of the ex-div date, which is simply the day after the last cum div day.
The dividend notice will also give you an estimated date of payment. This day is not always the day you will receive payment due to banking and money transfer processes that will be involved in paying you your dividend. It’s important to note that for dividends in specie the same rules will apply but there is one thing that may differ.
In many cases dividends in specie are offered as an option to cash dividend requiring election y the shareholder as to which they prefer. The company may offer a cash dividend or bonus shares instead. The shareholders are expected to make an individual election as to which they prefer and notify the company within a given period.
One final thing that people should get in the habit of doing when dividends are announced is to calculate the dividend yield. The dividend yield is a measure of the dividend paid to shareholders as a return on investment. It is expressed as a percentage. The point is to work out the rate of return on your money if you had to buy the shares today and the dividend being your earnings. It is calculated as Dividend/Share price x100. Just as a friendly tip that you should compare this percentage to other companies and investments before forming an opinion on whether it’s high or low.