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31 Cards in this Set
- Front
- Back
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Dividends
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Payment made out of a firm's earnings to its owners, in the form of either cash or shares
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How often can dividends be paid out?
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Annual, semi-annual, quarterly (less common)
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What is a mid year dividend called?
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Interim dividend
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What is an end of year dividend called?
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Final dividend
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What is a special dividend?
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An extra dividend paid on top of a regular dividend.
Viewed as a truly unusual or one-time event, not to be repeated |
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Dividend policy
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The decision on if/how to pay dividends versus retaining funds to reinvest in the firm
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What happens to the firm if no dividends are paid?
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The firm will grow more quickly
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What are some advantages of paying dividends?
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- Possibly tax advantages to cash dividends, rather than capital gains
- Clientele effects; shares attract particular groups, based on dividend yield and resulting tax effects (E.g. retired people buy utility stocks because they pay steady high dividends) - May be paid when part of company is liquidated/no good investments projects are available |
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What is the order of paying dividend dates?
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- Declaration Date
- Ex-dividend Date - Date of Record - Date of Payment |
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Declaration Date
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Date on which the board of directors passes a resolution to pay a dividend
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Ex-dividend date
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The date the share is said to trade 'ex dividend'
If you buy the share BEFORE this date, you are entitled to a dividend If you buy on or after this date, you will not get the dividend (previous owner will) |
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What happens to stock prices on the ex-dividend date?
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Stock price drops (usually by about the amount of the dividend)
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How many business days before the record date is the ex-dividend date?
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4
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Date of record
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Date by which holders must be on record to receive a dividend
- Company prepares a list, based on its record, as to who they believe are 'holders of record' (shareholders) |
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Date of Payment
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Date that the dividend cheques are mailed or deposited directly to shareholder's bank accounts
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DRIPS (Dividend Reinvestment Program)
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Sign up to have a percentage or all of your dividends automatically reinvested back into shares of stock
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What are the advantages of DRIPS?
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- popular among young investors (who are not reliant on dividends as income)
- No brokerage fee for shares acquired using dividends - Some companies allow investors to use dividends to buy shares at a discount from market prices |
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Classical Tax system
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Tax rate for capital gains LESS than tax rate for dividends
- favours payment of low dividends |
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Imputation Tax System
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Tax rate for dividends LESS than tax rate for capital gains
- favours payment of high dividends |
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What is the importance of dividend imputation?
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Reduces/eliminates double taxation of dividends to individuals
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How are dividends taxed and what does the dividend imputation do for that?
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- Once at corporate level
- Again at personal income level - IRD recognises that firm paid taxes on your behalf and so you can offset against the tax due, any tax payment already made by firm on your behalf |
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Why would a firm have low or no dividend payout?
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- young/growing firms wish to retain earnings for expansion
- Firm may be limited to amount it can pay out in dividends |
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How will a firm grow most quickly?
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If it retains it's earnings as there is more money to invest in capital
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Why would a firm have a high dividend payout?
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- Immediate income (especially for older, retired people)
- Bird in the hand - get money now because there is no guarantee that higher future dividends will be paid out |
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How can firms finance dividend payments and what is a disadvantage of that?
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- Issue more shares
- Incur flotation costs (cost of selling share) |
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Repurchase
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Firm buys back some of your stock for cash
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Stock dividend/bonds issue
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Additional shares issued to you without changing par value of existing shares
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Stock split
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Additional shares issued WITH a change in par value of existing shares
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Rights issue
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Stock holders are granted options to acquire new stock
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What happens to price when you increase the dividend?
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Price increases
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What happens to price when you decrease the dividend?
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Price decreases
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