What is a dividend?

A dividend is a sum of money a company might pay you if you hold shares in the business and they make a profit. Dividends are not guaranteed, and the amount can vary over time.

You may be aware of any dividends you’re entitled to in advance. The company that is providing dividends may contact you directly, or you may be contacted by the provider of the account in which you hold shares. This could be your investment account, ISA or pension.

Important dividend dates to know

There might be a few dates you want to keep track of if you invest in a company that offers dividends. 

• Announcement date – This will be the date that any dividend payments will be announced by the company. It’s usually the same day as the company’s full year results, these will then be approved by the shareholders at the annual general meeting (AGM).
• Ex-dividend date – For you to be able to qualify for a dividend payment you must have held shares in the company at market close of the day before the ex-dividend date. For UK shares this is usually a Thursday, which means you will need to have held the dividend by market close on Wednesday.
• Payment date – This is the date that the company actually pays you the dividend, this is usually a few weeks after the ex-dividend date. 

Typically, a company will pay dividends to reward their shareholders, as a means of distributing company profits and also to signal financial stability and health to investors. 

Offering up dividends to shareholders can encourage new investors to buy shares or existing investors to buy more.

Dividends can be paid in two different ways, cash dividends, or stock dividends. As the names imply, stock dividends will give you additional shares in the company, and cash dividends will simply pay you a cash lump sum.

If a company has an especially good quarter, or half year they might issue out a special dividend. These are bonuses that are usually a one-time payment in cash and can be larger than your usual dividend. 

If you decide to reinvest your dividend instead of being paid the cash value equivalent, you will be provided with a stock dividend by your company. A stock dividend will be provided in the form of additional shares, increasing the number of shares that you as a shareholder own.

If you're unsure on what works for you then you seek professional advice from a financial adviser.

Currently everyone has a dividend allowance of £500, and you will only pay tax on dividend income above that limit. However, if you have any unused personal tax allowance that’s generally used up by things like your salary, pensions and other income, you can use this to offset against any dividends received. 

If dividends are received in a tax wrapper such as an ISA or a pension, these are not liable for tax.

The amount of tax you will pay is dependent on your own personal circumstances and may change in the future.