Dividends: A simple explanation

Every Mickle

BY RANDY T ROWE
Contributor

Sunday, June 16, 2019

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Writer's Note - Last week in my first of two articles, I explained what is a divided and how are dividends paid? This week in part two, I explore why are dividends paid and give further details.

WHEN ARE DIVIDENDS PAID?

Dividends are paid out on a schedule that the directors of a company decide. They also decide on the amount to be paid. The shareholders of a company, however, give the final approval for the total amount paid as dividends each year; usually via a vote at the company's annual general meeting. Some companies pay out dividends every quarter (4 times a year/every 3 months). For example, NCB Financial Group (NCBFG) has made two dividend payment's already for 2019 and have scheduled two more for this year. Other companies pay out a single dividend each year. There is no set rule on frequency; each company determines its own schedule. Sometimes when a company has a one-off situation, they may call a sudden, “special dividend”. Carreras Limited did this in 2012. After wrapping up its old pension scheme, the extra funds left over were paid out to shareholders as a “special dividend”.

WHY?

Companies pay dividends to reward and increase the value that the shareholders get from a company. When a company pays out a dividend, you still own the shares after receiving the dividend so the money is like a payment to you for simply being an owner. Some people will even tell you that there are only 3 real benefits you can get from owning a stock; selling it, borrowing against it, or receiving a dividend from it. Many people, especially long-term investors, love dividends because they increase the amount of profit you get from owning a stock, and the dividend payout of strong companies tends to grow over the long term.

FURTHER DETAILS

Whenever a dividend is announced there are three key dates involved.

X-Date (ex-Date): This is the date on which buying the stock will no longer give you a part of an announced dividend. If you see a dividend announcement for a specific stock and want to buy it in order receive that dividend, then you have to buy it before the X-Date. People who buy on or after the X-Date still own the stock but won't get any of that dividend.

Record Date: This is the date on which the record of who owns all company shares is pulled. It is also sometimes called the “date of record”. The record date is usually one business day after the X-date. You can actually sell your shares after the record date but before the dividend is paid and still receive the dividend because on the record date, you were a shareholder.

Payment Date: This is the date on which the dividend is paid out to all shareholders identified on the record date. It can be close to or far from the other dates. Companies set payment dates to match their own internal schedules and plans, and to make sure they have sufficient cash on hand to pay out.

All dividends from publicly listed companies have to be announced ahead of time. In fact, the Jamaica Stock Exchange (JSE) has to be informed when the board of directors is meeting to even consider the payment of a dividend. The JSE broadcasts these notifications on their website (www.jamstockex.com) whenever they get them. They are called dividend considerations.

That name is used because the outcome of the meeting is not always that a dividend should be paid. In fact, Access Financial just released a notice saying that the outcome of their latest dividend consideration was to not pay one.

This isn't the norm. More often than not, once a dividend consideration is announced it's usually followed by a payment announcement.

Note also that while it's common, a dividend doesn't have to be money. Dividends can be any property, including other shares. When this is done it's called a Dividend in Specie.

In January 2018, Mayberry Investment Limited (MIL) declared a dividend in specie; they gave their shareholders 10% of the shares in a subsidiary company as a dividend. They later went on to list this subsidiary company on the JSE, but MIL shareholders owned shares in that company before the listing and for free, thanks to the dividend.

The final thing to note is that dividends paid out to Jamaican residents from local companies are taxed at a rate of 15%.

CONCLUSION

Dividends are a great way to earn a reward from a stock you own, without having to give up that stock. It's especially great for long term investors, as over time, if the company is good, the dividend can come close to or even surpass the amount that you initially bought the shares for. Imagine spending J$200k buying some shares, and a decade later, those shares are pay out J$200k every year as a dividend. That would be amazing, for those who can wait 10 years for that sort of payout that is. Investing for dividends is best done when you have a lot of money and can afford to leave it to sit for a long time. For people whose lives won't allow them that much cash or to wait that long to benefit, there are investment strategies other than dividend investing that you can follow; we'll speak about some of those in the future.

I'll close with the example of Michael Lee Chin. In 2002 he bought 75% of NCB for J$6 billion from FINSAC. Over the last 8 months, Lee-Chin has received a total of J$3.96 billion in dividends, and will receive another J$2.9 billion for the last half of this year. Seventeen years after buying and rescuing NCB Financial Group, he is receiving roughly 95% of his initial investment as a dividend in a single year. I would say that his investment paid off.

Now you know what a dividend is, and how good it can get; let's follow his example and find some of these deals on the market.

See you next week.

Randy T Rowe is a Business Strategy Consultant and autodidactic investor…Which is a fancy way to say he was too poor to lose any money so had to teach himself to invest carefully & sensibly. You can find him on Twitter (@RTRowe) and on his Personal Finance website www.everymickle.com. He sometimes wonders if fa'asing in people's business pays heavy dividends…It would explain why so many people do it…hmm…


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