Cash Dividend

  • The shortest description is that dividends are payments by a company to its shareholders.

Please also refer to our stock dividend, dividend reinvestment plan and cash stock option (Optional Dividend) pages on this website.

  • The part of the profits made by a company that it pays to its shareholders.
  • A distribution of wealth to the shareholders of a company, made out of the earnings during a period (year, half year, quarter or month).
  • The reward an investor receives for investing in the company. The higher the dividend, the higher the reward.
  • A taxable payment from a company to its shareholders.
  • Equities
  • ETF’s
  • Mutual Funds

Longer Description from the point of view of different market participants

Once the Dividend has been approved, the board of the company will declare the dividend. On the pay date of the event, the issuer will need to make sure that the Paying Agent has (or has access to) the funds for distribution.

The Registrar will need to record all the eligible positions as per close of day Record Date.

The Agent Bank will need to create the Event in the systems of the CSD (or in their own systems) and initiate messaging downstream. Assuming that payment is triggered automatically, the Agent needs to ensure that the funds are in the account so that all payments can be initiated correctly and on time.

Numbering Agencies need to update the status of the shares to “Ex-Dividend” or something that reflects that the transaction has taken place.

Any exchange that is listing the security will continue to list the security and see a change in pricing on the Ex Date (In theory, the Price will go down with the Dividend Amount)

Any index that included the security will continue to include the security in the index. The price of the individual share goes down.

At CSD level the cash needs to be booked to participants. To effect this, bookings (so called Payments free of Delivery) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Cash Dividend need to compensated (Cash Claims), meaning that an additional trade has to be created (Payment free of Delivery) to deliver the cash proceeds from the seller to the buyer. Messaging is generated at the issuer CSD and sent down the chain. The CSD needs to make sure that the cash amounts coming in and out are Reconciling with each other otherwise it would make a loss.

At Custodian level the cash needs to be booked to Clients. To effect this, bookings (so called Payments free of Delivery) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Cash Dividend need to compensated (Cash Claims), meaning that an additional trade has to be created (Payment free of Delivery) to deliver the cash proceeds from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Custodian needs to make sure that the cash amounts coming in and out are Reconciling with each other otherwise it would make a loss.

At Broker level the cash proceeds need to be booked. To effect this, bookings (so called Payments free of Delivery) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Cash Dividend need to compensated (Cash Claims), meaning that an additional trade has to be created (Payment free of Delivery) to deliver the Cash Proceeds from the seller to the buyer. Messaging is received from the Custodian (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Broker needs to make sure that the cash amounts coming in and out are Reconciling with each other otherwise it would make a loss.

If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to effect the transaction in their books. Stock may have to be recalled before the important dates of the event. In case of a Cash Dividend, the Cash Proceeds may have to be realigned back to the lender (depending on the terms and conditions under which the loan/collateral was agreed).

Fund Manager need to include the change in the fund accounting and possibly in the NAV. Or if the Fund Manager uses a Transfer Agent, then this is a task for the Transfer Agent.

    • In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Dividend.
    • These transactions need to be included in investment statements that are sent to investors also.

Vendors will have to update their systems with the correct information for the security and send messaging to their clients about it. On the Ex Date of the Event, the security will have to be updated with an “Ex Dividend” Status to reflect the pricing.

    • At Retail Bank level the additional shares need to be booked into Beneficial Owners Accounts. To effect this, bookings need to be made to clients. Open Trades that are in “matched” status as of Record Date of the Cash Dividend event need to compensated (cash claims), meaning that an additional payment has to be created  to deliver the additional cash proceeds from the seller to the buyer. Messaging is received from the higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description with the event and a reference to where source documentation can be found (online).
    • When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)

Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable). This can via real time messaging that they may receive, but it should also be in their periodic investment statements.

Background

There have been geographical differences especially with regards to frequency of paying Dividends (monthly, quarterly, half-yearly or yearly). There are also differences in the way the payments are made. For the countries that are connected to the T2S settlement platform (settlement in ECB money) the payments should be made via PfoD (Payment free of Delivery) trades, however there are also countries where payments are made by sending cheques to the shareholders via the post. It is therefore necessary that the registrar has the address details of the shareholders. There are also big differences in the way Dividends are announced, albeit via electronic or physical means.

    • Companies are not required to pay dividends. Companies that chose to do so, often have grown sufficiently and see no opportunities to invest in themselves to obtain growth. So rather than retaining the money, they give it to the shareholders.
    • Start up companies however, might choose to retain their income and use it to grow their business, meaning that shareholders will not receive payments in cash.
    • A third option to increase value for the shareholders is to pay off the debt of the company (especially debt with unattractive terms and conditions, ie high interest rates).
    • A company could also choose to use its profits to buy back its own stock (and by doing so increasing the value of the remaining outstanding shares).

Investors seek to maximise the value of their money. They might choose to put the money in a bank account and receive interest on it. But if they think certain shares will pay them a higher rate than the interest on a bank account, they might want to invest their money in those shares. The difference between putting your money in a bank account and investing it in shares is the risk you’re taking. When putting money in a bank account an investor knows beforehand how much interest they are going to get. When investing in securities, an investor has to take a gamble and wait and see how well the company is going to perform in the coming period and how much of the profit the company is transferring back to its owners (the company could decide to not pay a dividend at all).

The source of the money should normally be the Company’s earnings for the year.

  • CAEV
    • DVCA
  • CAMV
    • MAND
  • CAEP
    • DISN
  • CAOP
    • CASH
  • Qualifier CAEV = DVCA 
  • CAOP = CASH
  • Mandatory event => field 22F: CAMV = MAND

The Issuer will finalise its Income Statement and the Board of Directors review the financials. Based on the results they will formulate a Dividend Policy and derived from that a suggested dividend amount for the next Dividend Payment. This Dividend Payment is then one of the voting points in the General Meeting.

  • Announcement Date
  • Declaration Date
  • Ex Date
  • Record Date
  • Pay Date
  • MT54X (PfoD transactions)
  • MT564
  • MT566
  • Sese.025 (PfoD transactions)
  • Seev.031
  • Seev.036

!!Important!! You should contact your own Tax Advisor for your specific Tax queries. No rights can be derived from any information on this website or from any of the websites that the below text links to. This topic is included for Information purposes only.

As a starting point it may be good to notice the different names for Taxes that could potentially be involved (depending on jurisdiction):

  • Capital Gains Tax (CGT) – Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. More information about Capital Gains Tax can be found here for several countries. Capital Gains Tax does NOT usually apply to Dividend Payments if the Dividend is paid in Cash.
  • Withholding Tax – a tax deducted at source, especially one levied by some countries on interest or dividends paid to a person resident outside that country. A list of Withholding Taxes around the world can be found here. 
  • Dividend Tax – A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company. Under most Jurisdictions, Dividend Tax is a form of Income Tax and taxed accordingly at the individual level.
  • Income Tax – Income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. It’s often charged at different rates depending on the source of income and the individuals total earnings. To get an idea about different tax rates charged around the world, please check this table. Note that these rates can change in time. Note that there may be several layers of taxing authorities, for example; federal and provincial.
  • Stamp Duty – a tax that is charged in the UK and may be applicable to Corporate Action Events, like for example a Dividend Reinvestment Plan. More information can be found here: https://www.gov.uk/tax-buy-shares

There is no Capital Gains Tax on Dividends but there is Withholding Tax or Income Tax, depending on where you are in the world.

Here is the Dividend Timetable 2019 for HSBC, which can be found on the investor page of their website. As can be seen, HSBC pays their Dividends on a quarterly basis. The First Interim Dividend for the financial year 2019 was paid on the 5th of July at a rate of USD 0.10 (base currency = USD) and paid in GBP and HKD in the respective markets.

The next one coming up (I wrote this on the 2nd of October) will be announced today, the 2nd of October with Ex Date 10th and Record Date 11th of October in the countries where the shares are listed. The money will be paid to shareholders on the 20th of November.

Information about (upcoming) Dividends can be found in many places, for example;

For example, sites and apps like Yahoo Finance, CNBC, Morningstar, The Wall Street Journal, and Investopedia are all great resources available for researching dividend data.

  • Brokerage Accounts

An additional benefit for users of online accounts provided by a broker is the ability to tie into any current (or past) holdings from a portfolio that are dividend-payers and generate additional types of personalised reports and analysis.

  • U.S. Securities and Exchange Commission (SEC) Data

All publicly-traded companies are required by law to report on Form 1099 all dividends they have paid to investors during the previous tax year on a quarterly and annual basis. As a result, you can research these filings on SEC.gov using their EDGAR system. 

  • Specialty Providers and Paid Services

There are a number of dividend-focused specialty resources available online for getting comprehensive information on dividends. A good example is www.dividendmax.com

  • The Stock Exchanges

Tools and resources are also provided from the stock exchanges themselves to keep investors up-to-date with dividend data for the companies they list. A good example is Nasdaq: https://www.nasdaq.com/market-activity/dividends

Open trades that are in “matched” status on Record Date will be compensated, meaning that additional trades will be created to compensate the buyer who is entitled to the cash proceeds of the dividend.

With Cash Dividends there are no fractions

Dividend Sub Types.

There are several Sub Types of Dividends. You can find more information about these by clicking on the links.

Shareholders have the choice in which currency they want to receive the dividend in.

Shareholders can choose to receive Cash or Stock.

Shareholders can choose to keep the cash proceeds (take no action) or to use the cash proceeds to reinvest in the same stock. The stock will be bought in the secondary market by the Agent.

Due to unusual circumstances, for example the sale of a business unit, the company proposes to return the proceeds to shareholders in the form of a Special Dividend. This is often paid alongside a normal dividend.

Is a Dividend that is paid at the end of the Financial Year

Is a Dividend that is paid during the Financial Year

Is a Dividend that is paid every 3 months

Is a Dividend that is paid every month

Dividend Cuts

The idea is that companies return wealth to the shareholders as a reward for investing in them. As the company grows, it is more or less expected that the Dividend Payout grows with it. This type of Dividend Policy is often referred to as “Progressive Dividend Policy”.

However, sometimes companies hit choppy waters which can force them to pay a smaller dividend. This is known as a Dividend Cut. When this happens, it’s usually a big event and pretty much without exception will cause the share price to fall.

A good example of a Company that cut its Dividend is Vodafone in 2019. More about Vodafone’s Dividend Cut can be read about it here.

Theoretical Effects on the Share Price

Assumptions for the example:

 1) the investor holds 100,000 shares in company “ABC” before the event takes effect

2) the market price of the shares before the event = EUR 5.00

3) the nominal value of the shares before the event = EUR 1.00

4) Cash Dividend (EUR 0.35 per share)

In the example the shareholder will keep all their 100,000 shares and receive a cash payment of EUR 35,000 while the nominal value of the shares remains the same and the market value of the shares drops from EUR 5.00 to EUR 4.65.

Total value before the Ex Date of the event: 100,000 x EUR 5.00 = EUR 500,000

Total value after the Ex Date of the event: 100,000 x EUR 4.65 = EUR 465,000 (+ EUR 35,000 in cash).

The total Market Capitalisation of the company drops with the dividend amount.

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