There are two main ways people can make money from owning shares in a company: when the company’s value and share price increases over time, and through dividends which can contribute to a passive income stream.
What Are Dividends?
Dividends are when a company distributes a portion of its profits, in order to attract and reward shareholders. If you own shares of a company that chooses to pay dividends, you’ll receive a slice of the profits based on the number of shares you hold—paid in cash or in the form of extra or discounted shares.
It’s up to each company to decide whether it will pay dividends, how much profit to distribute, and how often. It could be monthly, quarterly, annually or a sporadic ‘special’ payment. Publicly traded companies listed on the Australian Securities Exchange (ASX) that offer dividends tend to pay twice a year, following full and half-year earnings announcements.
How much do you get paid?
The more shares you hold, the higher your cut. The amount you’ll receive is expressed as a value per share, such as 30 cents per share. The amount per share varies significantly depending on the company and its profitability.
High yields are good, but once yields start exceeding 10% it may be an indicator the stock is volatile and riskier
Do dividends affect your tax?
Yes, dividends count as taxable income. However, there may also be tax credits available if you receive fully franked or partially franked dividends from a company—which means the company has paid all or some of the tax already and you can offset this against your personal income tax.
What is dividend yield?
Dividend yield is a ratio that helps you understand the potential return for every dollar you invest in a stock. Dividend yield is expressed as a percentage, and is calculated by taking the annual value of a company’s dividends (per share) and dividing that by its current share price.
High yields are good, but once yields start exceeding 10% it may be an indicator the stock is volatile and riskier. Let’s say a company pays annual dividends per share of $2, and its share price is $20: the dividend yield would be 10%. If the share price halves, the yield jumps to 20%—but such a dramatic drop in share value could indicate a big problem with the company, and may mean future dividends are unsustainable.