A dividend is quite simply a portion of a company’s earnings distributed to its investors.

In the UK most companies pay two ordinary dividends per year, one at the half-way stage (the interim or first-half dividend) and one at the end of the year (the final dividend). Some UK firms pay quarterly dividends.

Sometimes, companies will decide to pay a special dividend on a one-off basis if their earnings have been particularly strong or they have sold a business and have no use for the cash themselves.

Investment trusts and funds also pay dividends to investors and they can be half-yearly, quarterly or even in some cases every month.

HOW DO YOU RECEIVE AN ORDINARY DIVIDEND?

To receive a dividend, you need to have a holding in a company, fund or investment trust that pays a dividend to its shareholders.

There are four important dates to keep in mind:

• Declaration date – The day the board of a company, fund or trust reveals its intention to pay a dividend, including the date and the amount per share.
• Ex-dividend date – Investors who own the shares before this date qualify for the upcoming dividend, those who buy the shares after this date and before the payment date are not entitled to the dividend.
• Record date – This is the date the company, fund or trust uses to determine who owns its shares and are therefore entitled to the dividend.
• Payment date – The dividend is dispensed and appears in your account. This is usually around one month after the record date.

In the days leading up to the ex-dividend date, the price of your shares might go up as other investors decide to buy because they also want the dividend.

On the day the stock goes ex-dividend, the share price usually drops by the same amount in order to compensate for the fact that if you buy the shares now you have no right to the dividend (they are ‘ex-rights’, in market parlance).

A DIVIDEND IN PRACTICE: GAMES WORKSHOP

On 16 October, fantasy games and miniatures retailer Games Workshop (GAW) declared it would pay a dividend of 85p per share ‘in line with the company’s policy to distribute truly surplus cash’, taking dividends declared up to that point for the financial year ending in May 2025 to 185p per share.

The dividend will be paid on 29 November to shareholders who are on the register on 25 October, with an ex-dividend date of 24 October.

The last date for elections for the dividend re-investment plan is 8 November.

WHAT IS A DIVIDEND REINVESTMENT PLAN?

In the Games Workshop example, the company mentions a dividend reinvestment plan (sometimes shortened to DRIP) which is a way to reinvest the income you receive back into buying more Games Workshop shares.

A number of companies have a DRIP, which you are free to sign up to as a shareholder, although not everyone will want to reinvest the income as some investors rely on their dividend income to help pay their monthly outgoings. Most investment platforms also offer a dividend reinvestment service.

In the Games Workshop example already discussed, unless you own a lot of shares, it may not be practical reinvesting the income as each share costs nearly £120, but you are only getting 85p to reinvest. You would need to own 140 shares to get enough money in dividends to buy one more share.

It is also important to note that there will be fees for reinvesting your dividend income, so if you own shares through a trading platform you should find out what these are before signing up to reinvest the proceeds.

ARE THERE OTHER KINDS OF DIVIDENDS?

Sometimes companies will give you the option of having more shares rather than a cash dividend - this is known as a ‘subscription’ or ‘scrip’ issue of new shares in lieu of dividends.

There are a couple of advantages to ‘scrip’ dividends. For investors, there is no dealing fee or stamp duty payable on the shares, while for the company it means they can keep the cash within the business.

However, ‘scrip’ dividends are taxed the same way as cash dividends, so if you fill in a self-assessment tax form you will need to declare them as income.

As a reminder, if you earn more than £500 from dividends in a year you will need to pay tax on this income unless your investment is held within an ISA.

You do not pay tax on any dividend income which falls within your personal allowance.

Many large UK companies pay scrip dividends, such as Barclays (BARC), BP (BP.), HSBC (HSBA), National Grid (NG.), Pennon Group (PNN) and Rolls Royce (RR.).

DO COMPANIES HAVE TO PAY DIVIDENDS?

There is no guarantee a company will pay a dividend, and firms may cut or suspend their dividend altogether if the business isn’t performing well.

It could be there has been a dramatic fall in earnings or the company has lowered its forecasts for the future due a change in its market.

During the pandemic, the whole of the UK banking was forced to suspend dividend payments by the regulator, which was concerned about their capital ratios and their ability to pay depositors. Many other firms also suspended their dividends in light of the uncertainty. 

In March 2024 builders merchant Travis Perkins (TPK) cut its dividend by 58% after announcing a major overhaul of its business to reduce costs and restructure its operations.

In July 2024, luxury group Burberry (BRBY) suspended its dividend altogether after it posted a disappointing trading update and its chief executive stepped down with immediate effect.

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