Understanding Dividends: A Comprehensive Guide

Dividends are a key aspect of investing in shares, offering a way for companies to distribute profits to their shareholders. This guide will delve into what dividends are, how they are declared and approved, the process of receiving them, and the roles of various players involved. Additionally, we’ll explore what to do if you haven’t received your dividend, the concept of dividend reinvesting, and important dates related to dividends such as the announcement date, book closure date, and payment date.

What Are Dividends?

A dividend is a portion of a company’s earnings that is distributed to its shareholders. It serves as a reward for the shareholders’ investment in the company. Dividends can be paid in cash, additional shares of stock (bonuses), or other assets, depending on the company’s dividend policy.

Types of Dividends:

1. Cash Dividends: The most common type, where shareholders receive a cash payment based on the number of shares they own.
2. Stock Dividends or Bonus Shares: Shareholders receive additional shares of the company’s stock instead of cash.
3. Special Dividends: A one-time distribution usually made when a company has surplus profits.
4. Interim Dividends: Dividends paid before a company’s annual earnings are finalized, typically based on half-yearly or quarterly earnings.
5. Final Dividends: Declared at the end of a company’s fiscal year after the finalization of earnings.

How Are Dividends Declared and Approved?

The process of declaring and approving dividends involves several steps, usually initiated by the company’s board of directors and requiring shareholder approval.

Steps in Declaring and Approving Dividends:

1. Earnings Review: The company’s management reviews its financial performance to determine whether it has sufficient profits to distribute as dividends.
2. Board of Directors Proposal: The board of directors proposes a dividend, specifying the amount per share and the type of dividend (cash, stock, etc.). The proposal is based on the company’s earnings, cash flow, and future investment needs.
3. Approval by Shareholders: The proposed dividend must be approved by the company’s shareholders during the Annual General Meeting (AGM) or an Extraordinary General Meeting (EGM). This step is usually a formality if the board has already recommended the dividend.
4. Dividend Announcement: Once approved, the company officially announces the dividend, including key details such as the amount, payment date, and record date. This information will be part of the corporate actions announced by NSE in their price lists.

How to Receive Dividends at the NSE

Receiving dividends as an investor in the Nairobi Securities Exchange (NSE) involves a few straightforward steps, provided you have a Central Depository System (CDS) account.

Steps to Receive Dividends:

1. Eligibility: To be eligible for a dividend, you must own shares in the company before the ex-dividend date, which is the cut-off date for being entitled to the dividend, i.e., book closure date (inclusive).
2. Record Date (Book Closure Date): This is the date on which the company reviews its records to determine which shareholders are eligible to receive the dividend. Only those who appear on the company’s shareholder list as of this date will receive the dividend.
3. Dividend Payment: On the payment date, the company disburses the dividend to eligible shareholders. Dividends are typically paid directly into your bank account, Mpesa, or cheque linked to your CDS account.
4. Tax Withholding: In Kenya, dividend payments are subject to withholding tax, which is deducted before the dividend is paid to you. The current withholding tax rate is 5% for residents and 10% for non-residents. This is paid directly by the registrar and deducted from the gross amount.

Who Sends Dividends and the Role of Each Player

Several key players are involved in the dividend payment process, each with specific roles and responsibilities.

Key Players and Their Roles:

1. The Company: The company itself is responsible for declaring, approving, and paying dividends. The company’s board of directors decides on the dividend amount and payment schedule, while the finance department handles the actual disbursement to the registrar.
2. Central Depository and Settlement Corporation (CDSC): The CDSC manages the electronic transfer of shares and ensures that dividends are credited to the correct accounts by providing updated payment details for each shareholder. They act as a liaison between the company and shareholders, ensuring that all eligible shareholders receive their dividends.
3. Stockbroker/Investment Bank: Your stockbroker or investment bank facilitates the process by ensuring that your CDS account is up-to-date and linked to your bank account for the payment of dividends at CDSC.
4. Share Registrar: The share registrar maintains the company’s shareholder register, which includes details of shareholders eligible to receive dividends. They work closely with the CDSC to ensure accurate and timely dividend payments.
5. Kenya Revenue Authority (KRA): KRA is involved in collecting withholding tax on dividends. The company deducts the tax and remits it to KRA before paying the dividend to shareholders.

What to Do If You Haven’t Received Your Dividend

If you haven’t received your dividend within the expected timeframe, there are several steps you can take to resolve the issue.

Steps to Take:

1. Check Your Bank Account: Ensure that the bank account linked to your CDS account is active and correct. Also, check if the dividend was credited but perhaps not yet reflected in your balance.
2. Contact Your Stockbroker: Reach out to your stockbroker or investment bank to confirm that your details are correct and that there were no issues during the dividend payment process.
3. Contact the Company’s Share Registrar: If the issue persists, contact the company’s share registrar. They can verify whether the dividend was processed and if there were any problems with your payment.
4. Inquire with CDSC: The CDSC can also assist in tracking the payment and ensuring that it was correctly processed.
5. Check for Lost Cheques: If you opted to receive your dividend by cheque and it hasn’t arrived, it may have been lost in the mail. In such cases, request a replacement cheque from the share registrar.

Dividend Reinvesting

Dividend reinvesting is the process of using your cash dividends to purchase additional shares of the company, rather than receiving the dividend in cash. This strategy can be beneficial for long-term investors looking to increase their shareholding and compound their returns over time.

Benefits of Dividend Reinvesting:

1. Compounding Returns: By reinvesting dividends, you buy more shares, which in turn can earn more dividends in the future, leading to exponential growth over time.
2. Increased Ownership: Reinvesting dividends increases your shareholding in the company, potentially giving you greater voting power and influence.
3. Cost Averaging: Reinvesting dividends regularly allows you to average the cost of your shares, buying more shares when prices are low and fewer when prices are high.

How to Reinvest Dividends:

1. Dividend Reinvestment Plans (DRIPs): Some companies offer DRIPs, which automatically reinvest your dividends into additional shares. Check if the company you’ve invested in offers this option. This is currently not available at NSE but innovations around this can greatly improve dividend payment.
2. Manual Reinvestment: If a DRIP isn’t available, you can manually use the cash dividends you receive to purchase additional shares through your stockbroker. This involves placing a buy order for the stock and using your dividend payment as the funds.

Important Dividend Dates

Understanding key dividend-related dates is crucial for maximizing your investment returns.

Key Dates to Know:

1. Announcement Date: The date on which the company announces the dividend, including details such as the amount, record date, and payment date.
2. Ex-Dividend Date: The date on or after which new buyers of the stock are not entitled to the declared dividend. If you purchase the stock on or after this date, you will not receive the upcoming dividend.
3. Record Date (Book Closure Date): The date on which the company determines which shareholders are eligible to receive the dividend. To receive the dividend, you must be on the company’s books as a shareholder on this date.
4. Payment Date: The date on which the dividend is actually paid to eligible shareholders.