Dividends are a distribution of profits by a company to its shareholders.
When a company generates earnings that exceed its operational and growth needs, it can pay a portion of these profits as a dividend. Any amount not distributed is taken to be re-invested in the business, called retained earnings.
In Singapore, companies must ensure their dividend practices are sustainable, and aligned with regulatory requirements.
What to Consider When Paying Dividends
Dividend income is a share of a company’s profits distributed to shareholders.
In Singapore, companies can only declare and pay dividends from their profits, as mandated by Section 403 of the Companies Act.
If a company has incurred a loss, it cannot legally issue dividends. Doing so is an offence.
The good news for shareholders who are tax residents of Singapore is that dividends received are already net of tax, meaning they are tax-free in your hands.
However, different tax rules may apply to shareholders residing outside of Singapore. For example, a US resident shareholder might be subject to tax on their worldwide income, including dividends from Singapore companies.
How are Dividends calculated and paid out?
Cash Dividend
The amount of profit a company distributes as dividends is determined by its dividend policy.
This policy typically outlines the company’s target payout amount, either as a fixed dollar amount per share or a percentage of the share price.
When a company announces a fixed dollar amount per share, your dividend payout is calculated by multiplying the number of shares you own by that amount.
For example, if you own 1,000 shares of a company and it pays a dividend of $0.68 per share, your total dividend would be $680 (1,000 shares * $0.68/share).
Dividend Payout Ratio
Alternatively, a company may express its dividend as a percentage of its net income, known as the target payout ratio.
This ratio indicates the proportion of profits the company intends to distribute to shareholders.
For example, if a company earns $100,000 in net income and has a target payout ratio of 20%, it will pay out $20,000 in dividends.
Dividend Yield
Beyond the dividend payout, another crucial calculation for both companies and investors is the dividend yield.
This metric measures the company’s annual dividend payment relative to the prevailing share price.
For example, if a company declares an annual dividend of $0.20 per share, and its stock is trading at $50, the dividend yield is 4%.
This means that for every $100 invested in the company’s stock, an investor can expect to receive $4 in annual dividend payments.
Dividend yield can be valuable for evaluating and comparing dividend-paying stocks, particularly those of listed companies when making investment decisions.
However, it’s important to note that the dynamics of dividend payments in private limited companies can differ significantly.
Dividend Essentials for Investors
- Shareholders receive dividends, a portion of a company’s profits, usually annually or quarterly. While semi-annual distributions are possible, they are less frequent, especially in the context of private limited companies.
- The dividend you receive depends on the number of shares you own and the company’s dividend policy, which may be a fixed amount per share or a percentage of profits.
- While not all companies pay dividends, larger, more established companies are generally more likely to offer them. In contrast, private limited companies tend to have less frequent dividend payouts.
Dividends are vital to the investment landscape, offering potential returns and insights into a company’s financial health.
Contact us to learn more about incorporating dividends into your investment strategy or as part of an employee share option scheme.
