Term:DIVIDEND

That portion of a company’s earnings which is paid out to shareholders – also sometimes called a “distribution”. Most blue chip companies have a dividend policy in terms of which they pay out a certain percentage of their after-tax profits as a dividend. This varies from company to company. Newly listed companies, which are growing rapidly, will usually choose to retain most or all of their profits to finance future growth, while old, mature companies will pay out a fixed percentage of profits. Some companies pay out 100% of their profits as dividends and sometimes they even pay out more than 100% if they have sufficient cash reserves (say, as the result of selling a subsidiary). The directors make a decision every six months about what dividend they are going to pay out. Before a dividend can be paid out, the Companies Act (71 of 2008) requires that the company pass a “Solvency and Liquidity” test. In terms of this test the company must be both solvent (i.e. its assets must be more than its liabilities) and liquid (it must be able to meet its cash outflows for the next 12 months out of its expected incomes). The directors have to vouch for the fact that it can pass this test. Once they have decided to pay a dividend they then choose a Last Day to Register (LDR) and a Date of Payment (usually about 6 weeks later). Then everyone who owns the shares on the LDR will receive the dividend. Dividends are paid out of the company’s after-tax profits and then they are subject to Dividends Withholding Tax (DWT) which was increased to 20% in 2017. If you are a shareholder, the money that is credited to your stockbroking account is after all taxes.

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