What is a dividend?

The payment of dividends, the decisive day, the P / E indicator, the taxation of dividends and other questions will surely be asked by not only a beginner, but also a more experienced investor.

So that you don’t have to worry unnecessarily, get acquainted with the individual terms that are related to dividends and shares.

Dividend is a nice word. Mainly in connection with the shares you own. But even dividends have their twists and turns, which may not be easy for everyone to understand.

Dividends are linked to shares. In order to acquire them, you must first buy shares, then hold these securities for at least the so-called decisive day. Unlike savings or other types of investing, you do not have to hold the shares all year to be entitled to a dividend payment.

What is a dividend and how is it calculated?

Dividend is the return on holding a share. You can own an unlimited number of shares. It all depends on your financial situation. It is basically a share in the profit of a joint-stock company, as they are the only ones that can issue shares. The person who holds the shares is called a shareholder. For example, you may be a shareholder in technology giant Alphabet, even if you own only one share of that company.

The dividend represents the transfer of part or all of the joint-stock company’s profit to shareholders. If the company fails and reports a loss or only a very low profit, shareholders may decide not to pay dividends. Likewise, shareholders at the General Meeting may decide to pay extraordinary income. Proposals for the payment of dividends are submitted to the shareholders by the company’s management. Shareholders can thus take these proposals into account or not deal with them. If retained earnings from previous years are paid out, the shareholder will receive a slightly higher dividend than is usual for other payments.

As a share is a security that is held for trading, a dividend payment is determined on the record date. If the investor held shares on that day, he will receive a dividend from the company. If he sold the shares a day in advance or bought them the day after, he gains nothing. The decisive day, as well as the payment date for which dividends can be collected, are set by the shareholders at the General Meeting. It must take place at least once a year. The final amount of the dividend will be agreed upon by the shareholders.

The amount of the dividend is usually related to the value of the share. The company’s board of directors proposes to shareholders that it use, for example, half of the profit to pay the dividend. This amount is divided by the number of shares to determine the unit return. Many analysts or economists then convert this yield into a percentage to express the annual yield. It is similar to the interest rate. It’s nice to know how much money you make per share.

How is dividend yield calculated?

Dividend yield is calculated according to the following formula:

DY = (gross dividend / market price of the share) x 100

If the gross dividend is $ 100 and the market price of the stock is $ 1,000, the dividend yield in this example will be ten percent. This is gross income, which the shareholder must tax 15 percent. In net terms, the shareholder will receive $ 75 per share.

It often happens that the share price increases by a net dividend yield before the decisive date. This is due to the fact that many investors buy shares only for dividends. As soon as they meet the condition of holding the securities on the decisive day, they then sell the share again. They speculatively expect that the decline in the share price on the stock exchange will be slower and they will still make a slight gain compared to the purchase and sale price.

We can show everything with a simple example. The day before the record date, the share price will increase by its net dividend yield. The stock will cost $ 1,085 instead of the usual $ 1,000. The investor will buy a share for this price. As soon as he meets the condition of the decisive day, he will sell the share. At the same time, he will hope that the share price will not return immediately to its original value, but perhaps to $ 1,030. if that happens, his net income will be $ 55. The dividend yield of $ 85 will cover part of the loss that will occur when the share price falls. In order for the investor not to be at a loss, the share price may fall to its usual level before the decisive day, ie to one thousand crowns. If its value falls below this limit, the shareholder realizes a loss on the sale of the share.

Joint-stock companies traded on one of the Czech stock exchanges usually pay dividends once a year. The exact dates are decided by the shareholders at the General Meeting. However, dividends can have half-yearly or quarterly maturities, as is the case with foreign companies such as Coca Cola or McDonalds.

How to get a dividend?

The dividend is paid by the bank, which ensures the payment of dividends. All you have to do is come to any bank branch with an identity card and the bank’s employees will pay dividends. Many companies send dividends directly to shareholders in their trading accounts. The shareholder must then include the dividend in his tax return.