Dividend

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Companies mostly pay dividends quarterly, although some pay monthly. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

A dividend is different than an investment fund distribution of income and realized capital gains made to mutual fund investors^[1] and exchange-traded fund (ETF) investors.

Dividend dates

For investors in companies paying a dividend, there is some terminology about dividend dates that is important to understand.^[2] Companies typically issue press releases regarding their dividend payments that include the payment terms, including the payment date and the record date. These press releases are governed by the listing requirements of the stock exchange so that there must be a clear understanding in the market-place as to who is entitled to receive the dividend declared.^[3]

The key terms, in chronological order, are:

Declaration date

This is the date on which the board of directors announces to shareholders and the market as a whole that the company will pay a dividend.

Ex-dividend date

The date that the buyer of a security is not entitled to the upcoming declared dividend, because the buyer will not be a holder of record.^[4] The date is dependent on record date and the settlement for the security. For example, there are three days of settlement for stock trades and therefore the ex-dividend date is normally two business days (3 minus 1) before the record date.

Record date

The date on which a security holder must be registered as a holder of an issue to receive the dividend.^[4] Any shareholders as of this date will get the most recent dividend. If you are buying a mutual fund, ETF, common shares or preferred shares and want to avoid getting the next dividend then wait until after the record date to buy it. If you are selling and want to avoid the dividend then sell it before the record date.

Payable date

This is the date that the company actually pays the dividend to shareholders who are eligible.

Types

Cash dividend

As the name implies, payment is made in cash. For securities held in a brokerage account, the funds are received electronically. If you hold the security in the form of share certificates you will receive the payment via cheque.

Stock dividend

The dividend is paid in the form of additional shares. A stock dividend must also be distinguished from a stock split.^[5]

Special dividend

A special dividend is a payment made by a company to its shareholders that the company declares to be separate from the typical recurring dividend cycle, if any, for the company. Usually when a company raises its normal dividend, the investor expectation is that this marks a sustained increase. In the case of a special dividend, however, the company is signalling that this is a one-off payment. Therefore, special dividends do not markedly affect valuation or yield calculations. Typically, special dividends are distributed if a company has exceptionally strong earnings that it wishes to distribute to shareholders or if it is making changes to its financial structure, such as debt ratio.

When the amount of the special dividend announced today represents a distribution of greater than 25% of the market capitalization of the company, Canadian securities regulation requires that the common shares shall trade on a “Due Bill” basis.^[6] The use of Due Bills will avoid confusion regarding the market value of the listed security.

Tax treatment

There are two types of dividends you may have received from taxable Canadian corporations: eligible dividends and other than eligible dividends.^[7]

When entered on a person's tax return, the actual amount of dividends is "grossed-up" by a specified factor, depending whether it was an eligible dividend or not. The goal of this mechanism is to achieve tax integration between corporate and personal taxation, by giving the individual who is receiving dividends a credit for the tax already paid at the corporate level.^[8]

For eligible dividends, the federal dividend tax credit will be 16.4354% of your taxable amount of eligible dividends included on line 120 of your return. For other than eligible dividends, the federal dividend tax credit is 13.3333% of your taxable amount of dividends reported on line 180 of your return.^[9]

Foreign dividends do not qualify for the dividend tax credit. If you paid foreign taxes on your interest or dividend income, you may be able to claim a foreign tax credit when you calculate your federal and provincial or territorial taxes (see Line 405).^[10]

Dividend reinvestment

Some companies have dividend reinvestment plans, or DRIPs. DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount.

Impact on mutual funds

What happens to the dividends paid to the mutual fund by companies whose shares the mutual fund holds? Those dividends form part of the income of the mutual fund, and increase the fund's net asset value (NAV). They are usually aggregated, the fund is paid its MER, and the remainder is then paid out to holders of the mutual fund in the form of distributions from the mutual fund.

What happens to the distributions paid out by the mutual fund to its unit holders? The NAV of the fund decreases by the amount of distribution paid out. Some unit-holders choose to DRIP, i.e. use the distribution to buy more units. The extra number of units just cancels out the drop in NAV, and the unit holder is left as before, except for some accounting.

In a non-registered account the investor must be aware that the distribution may include a return of capital element and therefore may change their adjusted cost base (ACB). Typically the final breakdown of the distributions is only known at end of the tax year and is included in the tax slips issued by the fund company.

References

^ Investopedia, Dividend definition, viewed June 18, 2012
^ Dividend Dates, US Securities and Exchange Commission,viewed February 25, 2009
^ TSX Company Manaul, D. Dividends and Other Distributions to Security Holders, viewed October 17, 2012.
^ ^a ^b Stock Market Terms - Stock Market Vocabulary: Glossary of Terms | TMXmoney, viewed February 24, 2014.
^ IT-88R2 - Stock dividends, viewed February 24, 2014.
^ OSC | Marketplaces, SROs & Clearing Agencies - Exchanges - TMX Group and TSX Inc. - Rule Review and Notices - TSX Notice of Approval - Amendments to TSX Company Manual, viewed February 24, 2014.
^ Canada Revenue Agency, Line 120 - Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations, viewed June 18, 2012
^ Taxing Canadian dividends, Integration model, viewed October 17, 2012
^ Canada Revenue Agency, Line 425 - Federal dividend tax credit, viewed June 18, 2012
^ Canada Revenue Agency, Line 121 - Foreign interest and dividends, viewed June 18, 2012

External links

[1] Investopedia, Dividend definition, viewed June 18, 2012

[2] Dividend Dates, US Securities and Exchange Commission,viewed February 25, 2009

[3] TSX Company Manaul, D. Dividends and Other Distributions to Security Holders, viewed October 17, 2012.

[tmx-4] Stock Market Terms - Stock Market Vocabulary: Glossary of Terms | TMXmoney, viewed February 24, 2014.

[5] IT-88R2 - Stock dividends, viewed February 24, 2014.

[6] OSC | Marketplaces, SROs & Clearing Agencies - Exchanges - TMX Group and TSX Inc. - Rule Review and Notices - TSX Notice of Approval - Amendments to TSX Company Manual, viewed February 24, 2014.

[7] Canada Revenue Agency, Line 120 - Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations, viewed June 18, 2012

[8] Taxing Canadian dividends, Integration model, viewed October 17, 2012

[9] Canada Revenue Agency, Line 425 - Federal dividend tax credit, viewed June 18, 2012

[10] Canada Revenue Agency, Line 121 - Foreign interest and dividends, viewed June 18, 2012

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