Finder makes money from featured partners, but editorial opinions are our own.

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.

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 the company's profits. In investing terms, these are known as dividends.

Learn about the different types of dividends, how they're applied and how they impact your taxable income in this guide.

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. If you owned 10,000 shares, your dividend payment would be much larger at $500.

What is the ex-dividend date?

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.

What is the dividend yield?

The dividend yield is presented as a percentage and indicates the value of the dividend payment in relation to the cost of the shares. It 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. 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 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.

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 that are paid at different times:

  • 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.

Why invest in dividend stocks?

Investors who buy dividend stocks usually do so because of the steady income stream that comes from them.
While nothing in investment is guaranteed and it all comes with risks, dividends are usually a sign of a company's well-being. As such, well-established businesses will often look to at the very least 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.

Dividend yields reach $97.7 billion

The latest figures released by Janus Henderson show that Australians received a record AUD$97.7 billion over the last corresponding period. A strengthening Australian dollar played a large role in reaching this record.

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 doesn't mean it will do this again the following year.

Back to top

How are dividends paid out?

Dividends follow a chronological order of events that shareholders should keep an eye out for.

  1. The company's business operations make it some money.
  2. The company lodges its finances and its board of directors chooses how much to pay out in the form of a dividend.
  3. The announcement date occurs when shareholders can vote on whether or not they approve of the board's plan.
  4. Shares go ex-dividend. When this date is declared, investors must hold the shares the day prior to get any of the dividends.
  5. The company will then have a record date for the cut-off and a payment date for when shareholders will receive their dividends.

Paying taxes 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 the money isn't being taxed twice by the Australian Taxation Office (ATO), you'll receive a franking credit for the tax already paid on the dividend by the company.

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.

How does a dividend reinvestment plan work?

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 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 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.

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 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.

Compare share trading platforms

Name Product Price per trade Inactivity fee Asset class International
eToro
Finder AwardExclusive
eToro
$0
US$10 per month if there’s been no log-in for 12 months
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get 12 months of investment tracking app Delta PRO for free when you fund your eToro account (T&Cs apply).
CFD service. Capital at risk.
Join the world's biggest social trading network when you trade stocks, commodities and currencies from the one account.
CMC Invest
Finder Award
CMC Invest
$0
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
$0 brokerage on US, UK, Canadian and Japanese markets (FX spreads apply).
Trade over 45,000 shares and ETFs from Australia and 15 major global markets. Plus, buy Aussie shares or ETFs for $0 brokerage up to $1,000 (First buy order of each security, each day - excludes margin loan settled trades).
Moomoo Share Trading
US$0.99
$0
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get an additional 30 days on top of the regular brokerage-free period for new accounts. T&Cs apply.
Trade shares on the ASX, the US markets and buy ETFs with Moomoo. Plus join a community over 20 million investors.
Spaceship US Investing
US$0
$0
US shares, ETFs
Yes
Dive into US markets with $0 brokerage, starting with just a $10 investment.
Unlock US stocks and ETFs with minimal entry barriers, offering straightforward, low-cost options for new and seasoned investors.
Tiger Brokers
US$2
$0
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get 10 no-brokerage US or ASX market trades in the first 180 days + 7% p.a. on uninvested cash + US$30 TSLA & US$30 NVDA shares with deposits up to AU$2,000. T&Cs apply.
Trade Australian, US and Asian stocks with no minimum deposit on Tiger Broker’s feature-packed platform.
Webull
US$0.25
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
Sign up & deposit $200 to get $100 of rewards value, or deposit $1,000 to get $200 worth. Up to $5,450 value available. T&Cs apply.
Trade ASX and US stocks and US options, plus gain access to inbuilt news platforms and educational resources. You can also start trading for less with fractional shares.
Saxo Invested
US$1
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
Access 22,000+ stocks on 50+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
loading

Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Dividends explained


Back to top

More guides on Finder

Ask a Question

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our 1. Terms Of Service and 6. Finder Group Privacy & Cookies Policy.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Go to site