# What are dividends?



## Chaka1988 (26 August 2009)

Hey guys
I dont really understand what are the dividends and how they accumulate?

Cheers


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## beamstas (26 August 2009)

*Re: Some info regarding dividens*



Chaka1988 said:


> Hey guys
> I dont really understand what are the dividends and how they accumulate?
> 
> Cheers




We own a company XYZ limited, making widgets.

There are two shareholders, you (chaka) and i (beamstas)

In the first year, XYZ limited makes a profit of $1
They pay income tax on the $1 of 30% (it's not 30% but for simplifiying we will say it is)

There is now 70c left

We both get half share each of the profit (35c each) as a fully franked dividend. The franking credit will be 15c ((35/7)*2). 

So you receive 35c CASH+15c TAX CREDIT each 

= the $1 profit.

So a dividend is basically a split of company profits between the shareholders.


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## Chaka1988 (26 August 2009)

*Re: Some info regarding dividens*

thanks for your super fast and comprehensive reply.
I have another question.
What is the average of the dividends of the big comapnies (such as nab, rio and bhp)?


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## Real1ty (26 August 2009)

*Re: Some info regarding dividens*



Chaka1988 said:


> thanks for your super fast and comprehensive reply.
> I have another question.
> What is the average of the dividends of the big companies (such as nab, rio and bhp)?




There is no average and dividends can and will also change depending on many different situations.

So what a company has payed in the past doesn't mean they will continue to pay that same amount or if they will pay anything at all.

Many companies this year have reduced or suspended paying a dividend due to the harder economic climate.

This link will allow you to have a look at what companies have paid in the past.

http://www.asx.com.au/asx/markets/dividends.do


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## Chaka1988 (26 August 2009)

Ok I have checked that.  But I dont really understand what they mean.
For example, here is what it says about Nab's dividends:
97C FRANKED @ 30% D.R.P. & B.S.P.

what does it mean?


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## Julia (26 August 2009)

Chaka, it might be a good idea for you to go to the ASX website, www.asx.com.au, where they have an extensive education section.

Best to do some reading about the basics.


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## swm79 (26 August 2009)

Chaka1988 said:


> Ok I have checked that.  But I dont really understand what they mean.
> For example, here is what it says about Nab's dividends:
> 97C FRANKED @ 30% D.R.P. & B.S.P.
> 
> what does it mean?




say you have 100 NAB shares... they pay a fully franked div... you receive $97 which NAB have already paid the tax on (i.e. 30%) therefore you receive a tax credit of $41

DRP = Dividend Reinvestment Plan 

BSP = Bonus Share Plan 

if you allect to enter the DRP that means instead of actually paying you the $97, the $97 (or some part of it, determined by you) will be used to buy more NAB shares at a price determined by NAB

and relatively the same for BSP


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## swm79 (26 August 2009)

Julia said:


> Chaka, it might be a good idea for you to go to the ASX website, www.asx.com.au, where they have an extensive education section.
> 
> Best to do some reading about the basics.




good idea julia

i'm sure you'd be able to find it on the NAB website to... which begs the question - why ask here?


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## lasty (26 August 2009)

swm79 said:


> good idea julia
> 
> i'm sure you'd be able to find it on the NAB website to... which begs the question - why ask here?




Umm.. because its a beginners lounge and they are here to learn.


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## Chaka1988 (26 August 2009)

swm79 said:


> say you have 100 NAB shares... they pay a fully franked div... you receive $97 which NAB have already paid the tax on (i.e. 30%) therefore you receive a tax credit of $41
> 
> DRP = Dividend Reinvestment Plan
> 
> ...




How did you get the number $41? How come I receive tax credit??
sorry for my newness.


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## nomore4s (26 August 2009)

Chaka1988 said:


> How did you get the number $41? How come I receive tax credit??
> sorry for my newness.




You receive a franking credit because the company has already paid tax on the D/E.

Please refer this link for a more detailed info on dividends

http://www.asx.com.au/programs/vignettes/lesson2part3.html

and this link might answer other questions regarding shares

http://www.asx.com.au/resources/education/index.htm


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## swm79 (26 August 2009)

Chaka1988 said:


> How did you get the number $41? How come I receive tax credit??
> sorry for my newness.




the number $41 is the fully franked dividend x 30/70 (30= tax rate, 70 = net amount of franking)

$97 x (30/70) - which tells me the amount of tax the company paid on your dividend.

i.e. the company would have paid tax on $138 profit per 100 shares 

$138 x 30% = 41

so you get $138 - 41 = 97 as a fully franked dividend


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## swm79 (26 August 2009)

Chaka1988 said:


> How come I receive tax credit??




because the company has already paid tax on the profits they made - which they then distribute to you

you get the credit because otherwise the govt would be taxing that money twice 

i.e. $138 * 30% = one lot of tax for govt from the company 

$97 * 30% (assuming that's your marginal rate) = one lot of tax from the same money from you

if that was the case the govt has taxed that money by 51% if they didnt give you the credit


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## Chaka1988 (26 August 2009)

swm79 said:


> because the company has already paid tax on the profits they made - which they then distribute to you
> 
> you get the credit because otherwise the govt would be taxing that money twice
> 
> ...




I think Im starting to get it... 
So I get the full $138 and from that I pay 41 as tax?


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## Zaij (26 August 2009)

On the subject of Dividends, I bought into Santos a while back and they've just gone ex-div but I never returned the 'what do you want to do with dividend: reinvest or cash' thing. Will they just mail a cheque to me or what?


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## swm79 (26 August 2009)

Chaka1988 said:


> I think Im starting to get it...
> So I get the full $138 and from that I pay 41 as tax?




well, no.

you get $97 in the hand.

the company has made $138 in profit for your 100 shares... they pay $41 in tax on that money, then they give you the remainder.

if they had have paid an unfranked dividend they would have given you $138, but they paid the tax ($41) on the $138 on your behalf and THEN gave you the remaining $97

BUT on your tax return you have to add BOTH the $97 AND the $41... but then the $41 gets reduced from your tax bill at the end anyway because the company has already made that payment for you.


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## swm79 (26 August 2009)

Zaij said:


> On the subject of Dividends, I bought into Santos a while back and they've just gone ex-div but I never returned the 'what do you want to do with dividend: reinvest or cash' thing. Will they just mail a cheque to me or what?




they'll post you a cheque


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## Chaka1988 (26 August 2009)

swm79 said:


> well, no.
> 
> you get $97 in the hand.
> 
> ...




Oh. Cheers for your help. Now I can tick dividens as mission accomplished


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## Zaij (27 August 2009)

Another question: Let's say I do the divident reinvestment plan with a 10% discount, the shares are selling at $100, while my total dividend is $160. So I get my one share, plus $70 is going to be reinvested with the next dividend.

But suppose I sell, what happens to that $70? Or what if I sell, but buy back in time for the next dividend. While this $70 still be sitting there, waiting, or will it dissapear in some bookkeeping magic?


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## Zaij (27 August 2009)

Bump?


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## swm79 (28 August 2009)

they'll give it back to you when you sell.


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## Early Bird (3 September 2009)

thanks for the info guys, was going to ask some similar questions myself... i just assumed that income tax would be payable on dividends unless i could offset them against interest payments on LOC but sounds like that is not the case at all? although these interest payments could be offset against CGT ?

Also, do dividend payments from index ETFs work any differently from those of normal shares? they seem to be more regular/reliable?

thanks again


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