Dividends are a distribution of a portion of a company’s profits to its shareholders. They can be paid in cash or by the granting of further shares in the company.
Not all companies declare or pay dividends with some choosing to reinvest their profits in the company or perhaps to fund acquisitions or diversification.
The important dates with regard to dividends are
- The ex-dividend date
- The dividend payment date
Smurfit Kappa Group plc have declared an ex-dividend date of 8th April 2021, a payment date of 7th May 2021 and a record date of 9th April 2021. The record date is the date by which you must be a shareholder in order to be entitled to receive the declared dividend.
Dividends are paid from after tax profits of the company and in Ireland the company is obliged to deduct 20% of the dividend as dividend withholding tax and pay it to the Revenue Commissioners. A company cannot pay dividends if it is loss making and dividend payments cannot be written off against a company’s tax liability.
Many companies pay dividends twice yearly-an interim dividend and a final dividend. Companies with a long history of paying dividends are attractive to investors because of the reliability of dividend income. For example, CRH holdings plc have a record of paying dividends for the last 50 years. In 2019 they paid out an interim dividend of 20 cents per share and a final dividend of 63 cents per share (paid in April 2020).
If a company gets into difficulty or runs into cash flow problems cutting or eradicating the dividend is an obvious measure open to the directors of the company.
The effect of compounding reinvested dividend income can account for nearly half of the return you will obtain from share investment.
Warren Buffett of Berkshire Hathaway, one of the most successful investors of all time, has never paid a dividend out of Berkshire Hathaway. He believes that the best course of action is to reinvest the company profits in the company to make more money and if an investor needs cash he can sell some shares.
There is influential economic research from Nobel Laureate winners to the effect that dividends are irrelevant. The more important areas to be concerned about are cash flow and earnings.
Dividend income is an important consideration in the minds of many investors, depending on their particular circumstances, age, willingness to accept risk, and other factors. Fast growth companies and those in the early stages of development are unlikely to be paying dividends so if it is steady, safe income and growth you are seeking a mature, stalwart type of company such as Smurfits or CRH will be a more attractive option for you.
If you are prepared to take more risk and you are more concerned about growth and share price appreciation you will be opting for younger companies in the earlier stages of their life cycle.
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