The dividend: information and its appearance

Significance of dividend

The payment of dividend also makes it attractive in the eyes of investors to joint stock companies which, due to their size and market position, are not able to show a significant increase in the exchange rate at the given time.

What is a dividend?

Dividends are usually payments made in cash, but either in shares or other title, which the company gives of the generated profits to its shareholders in proportion to their shares.

Dividends can be made not only in the case of joint stock companies, but you can also receive dividends as the owner of a limited liability company, also in proportion to the profit generated and also in proportion to your ownership share.
As the same rules apply to dividends withdrawn from a limited liability company as to dividends received on ordinary listed shares, we are now dealing with a payment received on listed shares.

Forms of dividend

Dividends paid in cash

Investors like to receive money after their investment even if they are not selling it. If a company chooses to pay dividends, it is easier to keep its shareholders because they are not looking for a place for their money where they will receive it.
The downside, however, is that what you distribute as a dividend, of course, can no longer be spent in the years to come.

Example

Let’s take a very simple example of the calculation (the calculation is so simple because of the example). Given a company worth HUF 100 million, with 1 million shares in circulation. The management of the company decides to pay a dividend of HUF 10 million from the generated profit.

HUF 10 million total dividends / 1 million shares = HUF 10 / piece

In this case, you will receive HUF 10 per share. (The company pays for all the shares you own, so the more shares you have, the more you will get)

Impact on the exchange rate

The question on your part is legitimate: if the company, which was worth HUF 100 million until then, paid out HUF 10 million of its assets, then according to them, your share is worth so much less.
Fortunately, this is very rarely the case, which typically happens that after the day the dividend is paid, the exchange rate decreases by the order of magnitude of the dividend, which then settles its lines. This is due to the fact that the company distributed this out of its profits. That is, all his assets remained, and presumably he even thought about growth.
Thus, we can say that the dividend paid in cash has no lasting and significant effect on the exchange rate.

Dividends paid in shares

In this case, the company will distribute additional shares among its shareholders in proportion to their shares. These are full-value shares, meaning that once you receive them, you can sell them at the current price, or you are entitled to receive a dividend on them as well.

The above example, which pays 10%, can be reworded here as 1.1 million shares will be in circulation instead of 1 million shares. So if you had a dividend of 100 before, you now have 110 shares.

Effect of payment per share

When you get a dividend in stock, it’s no coincidence that it’s a less common form.
Since everyone was given a + 10% share, you will receive the same share of the dividend distributed in cash the following year. What happens is that the rate per 1 share decreases, your total number of shares increases.

Item	Before dividends paid in shares	After dividends paid in shares
Total dividends paid	10 million forints	10 million forints
Number of shares	1 million pieces	1,1 million pieces
Dividend per share	10 forints / piece	9,09 forints / piece

Impact on the exchange rate

Because the actual value and performance of the company is independent of the number of shares outstanding, by increasing the number of shares outstanding, the same value is split into several.

Item	Before dividends paid in shares	After dividends paid in shares
The total value of the company	100 million forints	100 million forints
Number of shares	1 millió darab	1,1 million pieces
Value of 1 share	100 forints / piece	90,90 forints / piece

Dividends paid on a share can be said to reduce the price of the share.

Important things about paying dividends

Ownership information

The share is paid for after a small ownership slice of the joint stock company, i.e. the actual performance of the company. This is unpredictable, so if you prefer fixed income, choose a more predictable interest rate on your bonds.

Rate of payment

Whether you have a share is not yet certain that you will receive a dividend. Although shareholders like to receive, but the company’s management may decide not to pay anything at all in a given year.

If a company isn’t paying, the reasons for it can usually be simple:

there is nothing: if the company did not make enough profit to pay dividends, or if it made a loss outright, it will of course not pay anything
they need a reserve for future development plans: this will allow them to be more valueble the securities (including yours) later as a result of growth, as well as be able to pay out a larger amount as a result of increased profits.
they can also choose to reserve for any other issues that are important to the company

When are you entitled to dividends?

Operation of the company

Whether or not you have public access to a company’s securities is an irrelevant question as to whether you are eligible for dividend payment.

Date of purchase of shares

What matters, however, is when you get to that security. Businesses strive to always pay the current owner, but this has a lead time. Based on this, if that share was already yours before the payment, then you will be that person. The watched period (i.e., watching whose name the stock is registered on) usually ends in the 1 week before payment.

Actual owner of shares

If you bought shares through an mutual fund (say an equity fund), you will of course benefit in the same way from the effects of exchange rate changes (due in part to the actual performance of that company), but you are not entitled to dividends. This is because you are not the actual owner, but the investment fund. They also receive dividends, which, at their discretion, are either used to finance their own operations or built into the exchange rate.

Taxation of dividend received

The same applies to the taxation of dividends as for the taxation of investments. (At least in Hungary.) The only difference is that the dividend is due annually, so it cannot be interpreted as long-term.

For an individual

(The method or the rate of taxation in your country may differ from the Hungarian tax rules)
Separately taxable income, you will then have to pay a social contribution (currently 15.5%), which you must also include on your tax return. You can find out about the current rules on the NAV website.

For businesses

It improves the result of financial operations, which increases the overall profitability of the company.

Questions:

How much do you focus / will you focus on getting dividends on your own investments?
How much payout do you think can make a stock attractive if you don’t have significant price movements?
Which method of dividend payment do you see as more advantageous from your point of view? Why?

If you have any questions, please contact us so we can help you.