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What are dividends and how do they work?

Dividends allow investors to enjoy a share of a company's earnings. Here's how they work and how they can benefit you.

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When you buy shares in a company, you're effectively buying a piece of that company which means you're a part-owner. As a shareholder you're entitled to a share of the company's earnings, which comes in the form of dividends.

Learn about the different types of dividends, how they're applied and how they impact your taxable income in this guide. Plus, compare a range of online share trading platforms which allow you to start buying shares in companies that pay dividends.

🧪How we chose these brokers

For our Top Picks, we compared our Finder partners using a proprietary algorithm in August 2020. Keep in mind that our top picks may not always be the best for you, and you're encouraged to compare for yourself to find one that works for you. Read our full methodology here to find out more.

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, usually twice a year. The size of the dividend you receive is in proportion to the number of shares you own. The more shares you own the bigger your dividend payment will be.

For example, 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. However if you owned 10,000 shares, your dividend payment would be much larger at $500.

What is the ex-dividend date?

In order to receive a company's dividend payment, you must hold the shares prior to its 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.

Not all companies pay dividends

Instead of paying shareholders a dividend, a lot of smaller, newer companies will reinvest any profits made back into the company to help it grow. However, many investors are okay with this because if the company is growing, the value of their shares will grow too.

It's also important to note that dividends are never guaranteed. Each company decides what the value of the dividend will be and if there will even be a dividend payment at all, annually. So just because a company pays a large dividend one year, it doesn't mean it will do this again the following year.

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What is the dividend yield?

The dividend yield is presented as a percentage and is an indication of the value of the dividend payment in relation to the cost of the shares. The dividend yield is calculated by determining what percentage of the share price is returned to the investor as income. The dividend yield helps investors compare similar companies, as it gives you an idea of which one offers a better return on your money in the form of a dividend.

Dividend yield example

Let's look at company Pets Galore again with its dividend payment of $0.05 per share. If the current share price was $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.

Types of dividends

There are three main types of dividends, but not all companies will pay all three types to shareholders (and some won't pay any at all!).

  • Interim dividend. This is a dividend that's 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 six 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.

Paying 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 the franking credits system in Australia, 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%. So that the money isn't being taxed by the ATO twice, you'll receive a franking credit for the tax already paid on the dividend by the company. This means while you do need to include the dividend in your total taxable income, you'll receive a discount credit which will reduce your taxable income by the amount already paid by the company.

How does a dividend reinvestment plan work?

Some companies offer what is called a dividend reinvestment plan (known as a 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 good, passive 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 DRV is you're unable to use that cash for day-to-day purchases like you could if you had received it into 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.

How to compare dividend-paying shares

If you're comparing a bunch of dividend-paying companies, here are a few things to keep in mind.

  • 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 their dividend payments for the year ahead in advance.
  • 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.

Compare share trading platforms

Data indicated here is updated regularly
Name Product Standard brokerage fee Inactivity fee Markets International
IG Share Trading
Finder Award
IG Share Trading
AUD 8
AUD 50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares, Forex, CFDs, Margin trading
Yes
Brokerage discount: $5 on Australian shares for active traders & $0 commission on US and global shares
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, forex and CFDs, plus get access to 24-hour customer support.
eToro Share Trading (US stocks)
USD 0
USD 10 per month if there’s been no login for 12 months
Forex, CFDs, US shares
Yes
Zero brokerage share trading on US stocks with trades as low as $50.
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the world’s biggest social trading network when you trade stocks, commodities and forex from the one account.
Superhero share trading
AUD 5
No
ASX shares
No
Pay zero brokerage on all Australian ETFs.
Trade ASX stocks with a flat $5 commission fee and a low minimum investment of just $100.
CMC Markets Stockbroking
AUD 11
No
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading, mFunds
Yes
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, managed funds, forex, commodities and cryptocurrencies, plus access up to 15 major global and Australian stock exchanges.
SelfWealth Share Trading (Basic account)
AUD 9.5
AUD 0
ASX shares
No
Trade ASX-listed shares for a flat fee of $9.50, regardless of the trade size.
New customers receive free access to Community Insights with SelfWealth Premium for the first 90 days. Follow other investors and benchmark your portfolio performance.
ANZ Share Investing
AUD 19.95
No
ASX shares, Global shares, Margin trading, Options trading
Yes
Earn 1 Qantas Point per AU$3 spent on brokerage fees on certain instruments.
Access Morningstar reports, company announcements and and live pricing via ANZ’s share investing platform. Available for desktop and mobile.
Westpac Online Investing Account
AUD 19.95
AUD 63.50 per year on the global markets account
ASX shares, Global shares, Options trading, US shares
Yes
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Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares.

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