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Dividend Policy
Determining how much of a companys profit is to be
paid to shareholders as dividends and how much is to
be retained.
Declaration Date
Date board of directors pass a resolution to pay a dividend.
Record (Books Closing) Date
The date on which holders of record are designated
to receive a dividend.
This is 4 days after the ex-dividend date.
The idea is that if shares are traded cum-dividend, brokers
have time to notify the share register to ensure the new
shareholder receives the dividend.
Date of Payment
Date dividend cheques are mailed or dividends are paid
electronically.
Legal Considerations
Dividends can only be paid out of profit and are not
to be paid out of capital.
A dividend cannot be paid if it would make the company
insolvent.
Dividend restrictions may exist in covenants in trust
deeds and loan agreements.
Franked dividend carries credits for tax paid by the
company.
Under imputation, if a company has the capacity to pay
a franked dividend then, as a general rule, it must do so.
New Zealand also operates an imputation system
for dividends.
Dividend Imputation
Franked dividend
Carries a credit for income tax paid by the company.
Franking credit
Credit for Australian company tax paid which, when distributed
to shareholders, can be offset against their tax liability.
Withholding tax
Tax deducted by a company from the dividend payable to
a non-resident shareholder.
franking account
Account that records Australian tax paid on company profits,
this identifies the total amount of franking credits that can be
distributed to shareholders in the form of franked dividends.
Lintner found:
Companies have a long-term target payout ratio.
Managers focus on change in payout.
Dividends are smoothed relative to profits.
Managers avoid changes in dividends that may have
to be subsequently reversed.
Assumptions
No taxes, transaction costs, or other market
imperfections.
A fixed investment or capital budgeting program.
No personal taxes investors are indifferent between
receiving dividends or capital gains.
As of 2002, tc is 30%.
If all franking credits are not paid out, the credits that
are retained are potentially wasted as they have no
value except when accompanying dividend payments.
(At best, their value is discounted if they are used to
offer franking credits on future dividends.)
Investment opportunities
Differences in the nature of investment opportunities
will influence corporate financial decisions,
including dividends.
Dividend clienteles
Groups of investors who choose to invest in companies
that have dividend policies which meet their particular
requirements.
Disadvantages to investors:
Need to keep substantive and comprehensive records
throughout the period of ownership of assets affected
by capital gains tax.
Familiarisation with plan and its tax consequences.
No control over the reinvestment price.
Discount disadvantages shareholders who do not
participate in the DRP.