Top of main content

What is a dividend?

A dividend is a slice of a company’s post-tax profits that is ‘divided up’ among some or all of its shareholders as a reward for investing in them.

The company decides the amount and form of dividends paid, which can be in cash or additional shares.

Here, we look at:

Why do companies pay dividends?

How do dividends work?

What is dividend yield?

How often are dividends paid out?

Do you pay tax on dividends? 

Why do companies pay dividends?

Dividends allow companies to share their profits with shareholders to reward them for their ongoing support. It can also motivate shareholders to maintain their stocks in the company by generating an income. 

However, not all companies pay dividends. And they can usually only do so if they make a profit.   

How do dividends work?

If a company earns a profit, the board of directors can propose giving out dividends. They may also allow shareholders to vote on this proposal during a General Shareholders Meeting.  

Dividends can come in different forms. Examples include: 

Cash dividends

With cash dividends, you receive money in your account. You can either receive this at the end of the financial year (as a final dividend) or before (as an interim dividend).  

Stock dividends

Some companies may offer its shareholders the option of receiving additional company shares instead of cash payments – generally referred to as stock dividends or bonus issues.

They are usually shares offered of the same value as the cash dividend, but instead of receiving cash, those shareholders that select the option, receive shares instead.

What is dividend yield?

The dividend yield shows how much a company pays out in dividends each year relative to its share price. For example, a stock with a dividend payment of £2 and a share price of £20 would have a dividend yield of 10%.

While dividend yield can help you evaluate return on investment, it shouldn’t be the only factor you consider when choosing your investments

Remember, the value of investments can go down as well as up, and you may not get back what you invest. 

How often are dividends paid out?

This depends on the financial performance and policies of the company. Dividends are usually declared and paid regularly, either quarterly or annually.

Some companies pay dividends more frequently, while others may have irregular payment schedules. However, there are no guarantees, and past dividend payments do not guarantee future payments.

Do you pay tax on dividends?

You can earn some dividend income each year without paying tax. 

How much is tax-free will depend on your circumstances and whether the dividend amount is above or below your personal allowances. 

What is a Personal Allowance?

Your Personal Allowance is the amount of income you can earn each year tax-free. 

If the dividend amount you receive falls within your allowance, you won’t have to pay tax on it. The standard Personal Allowance is currently £12,570 . 

If your dividend income pushes your overall income above your allowance, you may have to pay tax. 

What is dividend allowance?

You also get a dividend allowance each year in addition to your Personal Allowance. 

The dividend allowance is a tax-free amount you can receive as dividends without paying tax. From 6 April 2024, the dividend allowance will be £500 (down from £1,000).

Dividends received by pension funds or received on shares within an ISA are tax-free and won’t impact your dividend allowance or personal allowance.

How much tax do you pay above your allowances?

How much tax you pay on dividends above this threshold depends on your income tax band

For more information, visit GOV.UK: Tax on dividends.

As with all things tax-related, the value of the benefits to you will depend on your circumstances, and tax rules could change in the future. 

This article was last updated: 02/05/2024, 09:06