What are dividends?

Dividends are passive income, stock market-style.

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By

Alison Banney

&

Cameron Micallef

Edited by

Thomas Stelzer

Updated

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Key takeaways

  • Dividends are payouts made to shareholders from a company's profits.
  • Many Australian companies pay dividends to shareholders, with the best dividend stocks paying yields of 10% or more.
  • Dividend payments are considered taxable income, but franking credits will reduce the potential tax you owe on your dividends.

When you buy shares in a company, you're effectively buying a piece of that company.

As a shareholder, you can be entitled to a portion of the company's profits.

In investing terms, these are known as dividends.

So what is a dividend?

A dividend is a share of a company's earnings given to shareholders as a cash payment into their bank account.

The more shares you own, the bigger your dividend payment will be.

Dividends are normally paid out twice a year in Australia, after the release of a company's half-yearly and full year financial results.

How do dividends work in Australia?

Let's pretend a company that sells items for household pets called Pets Galore is offering a dividend payment of $0.05 for each share held.

If you owned 1,000 shares, you'd receive a dividend of $50. If you owned 10,000 shares, your dividend payment would be much larger at $500.

In order to receive a company's dividend payment, you need to have held the shares before what's known as the ex-dividend date.

If you buy shares on or after an ex-dividend date, you will be eligible for the next dividend payment, if there is one.

According to data from investment fund Janus Henderson, Australian investors received US$60.8 billion in dividends in 2023.2

VIDEO: Dividends explained

5:00

What is the dividend yield?

The dividend yield measures the value of a company's dividend payment in relation to the cost of the company's shares.

The higher the payment relative to the share price, the higher the yield.

A dividend yield is calculated as a percentage and is used by investors to help choose which company to invest in.

According to data from the Australian Tax Office and S&P Dow Jones Indices, the average dividend yield for All Ordinaries stocks is 3.83% so far in 2024.1

Dividend yield example

Let's look at Pets Galore again with its dividend payment of $0.05 per share.

If the current share price is $2 per share, the dividend yield would be 2.5%.

If the share price was instead $0.50 per share, the dividend yield would be a lot better at 10%.

Because the yield is calculated using the share price, the yield will change daily as the share price changes.

Why invest in dividend stocks?

Investors who buy dividend stocks usually do so because of the steady income stream they offer.

When you invest in non-dividend shares, you only make money when you sell the shares themselves.

By comparison, dividend stocks let you earn money without you having to sell anything from your stock portfolio.

While some growth-focused stocks may offer a better return, many types of investor (such as retirees) prefer dividend stocks as a source of passive income.

A consistently-high dividend is also considered a sign of a company's overall health and profitability.

Well-established businesses will often look to pay the same dividend as the previous corresponding period, even in tougher economic times.

If they were to cut dividends, it's usually seen as a bad sign by the market, which can result in a lower share price.

Finder survey: Approximately how much do Australians earn in dividends each year?

Response
I don't earn any dividends39.04%
Less than $50013.15%
No idea11.55%
Between $500 - $200010.36%
I reinvest my dividends8.96%
$2001 - $50006.37%
Over $200003.98%
$5001 - $100003.69%
$10001-$200002.89%
Source: Finder survey by Pure Profile of 1004 Australians, December 2023

Types of dividends

There are 3 main types of dividends:

  • Interim dividend. This is a dividend paid before the company has calculated its annual earnings. It'll usually be paid at the same time as the company's interim financial statements, usually 6 months into the financial year.
  • Final dividend. This dividend payment is paid when a company announces its profits for the full financial year. Some companies will only pay a final dividend.
  • Special dividend. These are bonus dividends and are typically larger than the normal dividends paid out by a company. A company may issue a special dividend to shareholders when it achieves higher-than-normal profits across a certain period.

Do you have to pay tax on dividends?

Because dividend payments are a form of income, you do need to include these in your total taxable income when you file your tax return.

However, thanks to Australia's franking credits system, you often won't need to pay much tax on your dividends (or any at all).

Fully franked dividends mean the company has already paid tax on the money at the company tax rate of 30%.

To stop this money being taxed twice by the ATO, you'll receive a franking credit for the tax already paid on the dividend by the company. Depending on your personal tax rate, this means you'll effectively only need to pay a small percentage in tax, or even no tax at all.

This means that while you do need to include the dividend in your total taxable income, you'll receive a discount credit that will reduce your taxable income by the amount already paid by the company.

What is a dividend reinvestment plan?

Some companies offer what is called a dividend reinvestment plan (DRP), which allows you to opt in to using your dividends to buy more shares in the company instead of receiving the dividend payment in your bank account.

There are several advantages of doing this, but the main one is you're able to use the money to buy more shares without paying any brokerage fees.

It's also a way to increase your position in a company gradually over time with little to no effort from you.

It's a good set-and-forget investment strategy: once you opt in, it all happens in the background automatically.

One downside of opting in to a DRP is you're unable to use that cash for day-to-day purchases like you could if you had received it in your bank account. You also don't get to choose at what share price you'd like to buy more shares: the shares are automatically bought on your behalf on the date of the dividend payment.

What to look for in a dividend stock

  • How often are dividends paid? Some companies pay dividends several times a year while others only pay once.
  • Have dividends been confirmed? Companies will often confirm in advance their dividend payments for the year ahead.
  • Are dividends growing in value? Take a look back at the dividends paid by each company over previous years. If the value of the dividend has gradually increased, this is a good sign the company is growing and will likely continue to increase its dividend.
  • What's the dividend yield? Is the yield higher than what you could earn with a high interest savings account?
  • Is it fully franked? If the dividends aren't fully franked, when you file your income tax return you won't receive a credit and you'll need to pay the full income tax on the dividend yourself.

How to invest in dividend stocks

In order to buy dividend stocks in Australia, you'll need an account with a broker or online share trading platform. You can compare popular platforms in the table below.

Most platforms now offer information on dividend stocks. Once you've signed up for an account, you should be able to research and compare a company's dividend schedule, yield and history.

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Frequently asked questions

Sources

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To make sure you get accurate and helpful information, this guide has been edited by Thomas Stelzer as part of our fact-checking process.
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Written by

Editorial Manager, Money
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Alison is an editor at Finder and a personal finance journalist with over 10 years of experience, having contributed to major financial institutions and publications such as Westpac, Money Magazine, and Yahoo Finance. She is frequently quoted in media outlets like SmartCompany and SBS, offering expert insights on superannuation and money management. Alison holds a Bachelor of Communications in Public Relations and Journalism from the University of Newcastle, and has earned three ASIC RG146 certifications in superannuation, securities and managed investments and general financial advice, ensuring her expertise is fully aligned with ASIC standards. See full bio

Alison's expertise
Alison has written 575 Finder guides across topics including:
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Cameron Micallef is a personal finance journalist with eight years of experience, specialising in investing, property and household bills. He has written for Smart Property Investment, nestegg and Investor Daily. Cameron holds a Bachelor’s degree in Communication and Media Studies and Commerce, as well as a Tier 1 Generic Knowledge certification (RG146), ensuring compliance with ASIC standards. See full bio

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2 Responses

    chris's avatar
    chrisNovember 18, 2024

    where may I find a list of ASX300 companies whose shares are fully franked ?

      Thomas Stelzer's headshotFinder
      ThomasNovember 20, 2024Finder

      Hi Chris,

      You can find which ASX 300 shares are fully-franked using the list here. However, a company may choose to change the franking percentage they offer on dividends so this list will change over time.

      Thanks,

      Tom

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