Questions about Yield, Ex-Dividend and Record Date

Q. Why do I have to pay tax on shareholdings?


A: Taxes are a way for the state to generate revenue and unfortunately all share investors are liable to a 10% tax on company dividends which is usually deducted by your broker. Even more so higher band payers may be liable to an extra 25% on dividends summing up the effective rate to over 30%. Higher tax payers are however able to seek refuge in an Individual Savings Accounts (ISA) or a Self-Invested Personal Pension (Sipp) and thus escape the additional charge.

Q. What is Dividend Cover?

A: Dividend cover is calculated by dividing a company's dividends by its earnings. This ratio is useful in that it measures how much of a company's earnings are paid to shareholders in the form of dividends.

dividend cover = EPS/DPS

For example, if the dividend cover is 3, this means that the firm's profit attributable to shareholders was three times the amount of dividend paid out.

So what does Dividend Cover measure?

Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out. The higher the cover, the better the ability to maintain dividends if profits drop. This needs to be looked at in the context of how stable a company's earnings are: a low level of dividend cover might be acceptable in a company with very stable profits, but the same level of cover at a company with volatile profits would indicate that dividends are at risk.

The dividend cover ratio is computed by dividing the forecast dividend per share (DPS) number by the forecast earnings per share (EPS) figure. Note that when dividend cover drops perilously close to one, this means that earnings are only just covering the dividend payment, which leaves little or no money available to reinvest in the business which usually means that shareholders are due for a cut in dividend payout. If the ratio is under one, the company is using its retained earnings from a previous year to pay investors. If the dividend cover is over 2 then this should be fine assuming free cashflow is a healthy figure.

Once Again, the Hemline Theory...
Longer hemlines are showing up in fashion designs for
spring 2008, indicating that U.S. economic woes could
worsen.... [T]he hemline theory has proved correct at
times. Hemlines were short in the Roaring Twenties but fell
before the 1929 stock-market crash. In the '60s miniskirts
were en vogue, and stocks rose. In the summer of 2006,
designers showed short hems for spring, and in May the
Standard & Poor's 500 Index hit a seven-year high.

("Hemline Theory," Time 170 No. 13 (24 September 2007), 19.)

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Q. What is the difference between the ex dividend and record date?

When does one need to sell the stock to remain qualified for the Dividend? For VOD ex dividend date is 6/6/07 but the record date is 8/6/07.

A: You can ignore the record date to all intents and purposes it is irrelevant.

The difference is that if you are on the shareholders' register on the record date you will get the dividend from the registrars. If you sell between the ex dividend date and the record date, the stock exchange will give you the dividend and claim it from the buyer who is not entitled to it but will get it from the registrars as he will be on the register on the record date.

The distinction used to be much more important but these days registration happens automatically on settlement three days after trading and so in practice you will be added and removed from the register at the right time for the vast majority of shares (the ones on CREST). In other words if you sell the day before the ex-dividend date you will be removed from the register on settlement the day before the record date.

Think back to the days, pre computer, of ledgers and clerically maintained share registers and postal transactions. There had to be a cut off point to send out the divs. The record date was that point and it gave the company secretary 2 days to get the register in shape as at ex-dividend date. If due to delays someone was paid a div they were not entitled to or vice-versa then this would be sorted later. I have in the past received requests for the repayment of divs when I have bought ex-div but the payment has been made. IGNORE THE RECORD DATE

1.) The record date is (usually if not always) two days after the ex-div date.
2.) The ex-div date is the important date regarding dividends.
3.) To get the div you must be holding from the close of business the day prior to ex-div day thru to opening on ex-div day. I believe ex-dividend date is always on a Wednesday.

Q. Can you tell me how to find out dates of company ex-dividend dates?

A: A couple of sites that list forthcoming ex-div dates are included in my financial directory.

If it is an individual company you are after then do a company search at and select the 'key dates' link (note that future ex-div dates that haven't been formally announced by the company will simply be last years date plus a year).

Alternatively, check the company's official results announcements from which should include the ex-div date (nb: they usually refer to the date on which shareholders must be registered. This will be 2 days after the ex-div date - a quick check is that ex-div dates are virtually always a Wednesday and the register date will be a Friday).

Q. What is the difference between a SCRIP and a DRIP?

A: These are two schemes run by some firms in which they automatically accumulate your dividends on a continual basis until there is sufficient money to buy more shares.

So a scrip dividend is when you receive shares instead of a cash dividend. In such instances the company will buy shares on your behalf at the current price with your cash dividend and any balance remaining being mailed to you by cheque. The terms and share prices are agreed beforehand which is usually at a discount to the market price.

In a drip on the other hand the company accumulates the balance with future years and keeps buying more shares for you when possible. This is very similar to a scrip dividend with differences being that with a drip there are small dealing costs and the number of shares a shareholder acquires depends on the share price on the day of the purchase itself.

Both SCRIP and DRIP schemes offer the compounding benefit but apart from that there is no advantage as far as taxes are concerned as you still get dividend tax receipts for the Inland Revenue. It would be logical to opt for this if share prices are low.

For the companies involved these schemes helps them retain cash for funding the future growth of the company. For shareholders, benefits also include the ability to acquire additional shares without incurring transaction costs such as brokerage fees.

Q. What is Cashflow?

A: Cashflow figures is often used as a barometer to a company's health, more so because cashflow figures are more difficult to manipulate than profits and in the long term are impossible to fabricate (the same can't sometimes be said of dividends cover since managers may be tempted to transfer losses from the profit and loss account onto the balance sheet).

To measure cashflow you need to add the profit and loss account's operating profit (i.e. EBIT) to the depreciation and amortisation numbers which you can find from the cashflow statement. This returns the EBITDA i.e. the earnings before interest depreciation and amortisation which can then be compared to a company's net debt position. The lower the net debt/EBITDA ratio the better as this means a firm is making sufficient cash to help service its debts.

Q. Please explain 'Yield'?

A: Yield is value of the share price that the company pays out in dividends. If the share price is 50 and it pays a 2p dividend, that is a 4% yield. Not all companies like to pay out a high dividend, as it leaves them with less cash to reinvest in the business.


£100 in bank, giving £10 interest per annum = gross yield 10%
£100 in gilts, giving £10 of coupons per annum = gross yield 10%
£100 in shares that pay a £10 dividend per annum = gross yield 10%
£100 (whether borrowed or not) invested in property that pays a rent of £10 pa = gross yield 10%
Yield in property terms is the yearly rental income as a % of the market price.

 ...Continues here - AIM and FTSE Stocks

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