Equity: Q5

Q5: Why do listed companies ‘declare a dividend’ (ie announce their intention to pay a dividend) before they actually pay it? What don’t they simply pay a dividend in ‘one go’?

A:

Listed companies in Australia generally must give at least 28 days’ notice of their intention to pay a dividend. Companies will announce to the share market (and usually also directly contact their shareholders) when they intend to pay a dividend and how much that dividend will be. This is usually referred to as ‘declaring a dividend’. When the directors of a company pass a resolution to pay a dividend in the future (usually a month or two in the future) this will commit the company to pay this dividend to its shareholders and creates a liability called Dividends payable (or something similar).

The reason listed companies are required to give notice of a payment of dividends in advance is so that a date can be set when owners of shares will be entitled to a dividend and the date after which any new owner of the shares will not be entitled to the dividend. For example, Wesfarmers declared a dividend of $1.20 on 17 August 2017 to be paid on 28 September 2017. The shares of Wesfarmers went ‘ex-dividend’ on 22 August 2017. This means that if you purchase Wesfarmers shares after this date, you will not be entitled to this dividend (and the previous owner of the shares will receive this dividend).

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Also, see Martin’s videos Declare a Dividend

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