A dividend is the distribution of a reward from a portion of the company’s earnings and is paid to a class of its shareholders. Dividends are decided and managed by the company’s board of directors, though they must be approved by the shareholders through their voting rights.
Dividends can be issued as cash payments, as shares, or other property, though cash dividends are the most common.
While the major portion of the profits of a company is kept within the company as retained earnings, which represent the money to be used for the company’s ongoing and future business activities, the remainder can be allocated to the shareholders as a dividend.
The board of directors can choose to issue dividends over various time frames and with different payout rates. Dividends can be paid at a scheduled frequency, e.g. monthly, quarterly or annually.
Dividend payment procedures follow a chronological order of events and the associated dates are important to determine the shareholders who qualify for receiving the dividend payment. This chronological order consists of the following important dates;
- The Announcement Date is the date on which the dividend is announced by the company’s management and must be approved by the shareholders before they can be paid.
- The Ex-dividend Date, or simply put ‘ex-date’, is the date on which the dividend becomes ineligible. For instance, if stock in a company has a certain ex-date, then the shareholder who buys the stock on or after that ex-date will not qualify for the dividend as they are buying in on or after the dividend expiry date. Shareholders who own the stock prior to the ex-date, will receive the dividend.
- The Record Date is the cut-off date, established by the company in order to determine which shareholders are eligible to receive a dividend or distribution.
- The Payment Date is the date on which the company issues a payment of the dividend, and is the date on which the money gets credited to the investors’ accounts.
Section 46 of the Companies Act No 71 of 2008 (“the Act”) sets out the requirements that a company must meet before making a distribution. A company must not make any proposed distribution to its shareholders unless the distribution:
- Has been authorised by the board of directors by way of adopting a resolution;
- It reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and
- The board of the company acknowledges, by way of a resolution, that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)