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What is a dividend?
A dividend is a payment made to shareholders out of profits made by the company.
Unprofitable companies are not expected to make dividend payments, not all profitable ones do and amongst those that do they may pay widely varying proportions of the profit as dividends - from almost none to almost all.
Dividends may be paid regularly - annually, half yearly or quarterly. Alternatively, special dividends may used to make one-off payments.
A company may have issued different types of shares - ordinary, preference - and it is possible that the dividend will only be payable on some types of shares.
Dividends are treated as income for tax purposes. There is a nominal rate of 10% tax paid on dividends received - this is treated as if it has been paid even though no tax was actually deducted (although really tax has already been taken off the company by way of corporation tax on the profits made before the dividend was paid). Further income tax should only be required from shareholders receiving the dividends if they are taxed on the higher rate of income tax.
Dividend payments
A company will announce a dividend around the time that it releases its trading data. This will specify the amount of the dividend, the ex-dividend trading date, the record data, the payment date and potentially other details.
The ex-dividend date (ex-div) is the date when you must have been a shareholder in order to qualify for the dividend. So if the ex-div date is 01 March 2011 then holders of the shares at the close of business on 01 March 2011 are the ones that qualify for the dividends.
When shares are bought or sold it can take a day or two for the shareholders register (the record of all shareholders of a company) to be updated. As a result, the record date specifies the date by which all share transactions need to be reported to the company in order for them to make the correct dividend payments.
If you buy your shares via a broker then this will all be dealt with for you and not action is required.
The company will make the dividend payments to the qualifying shareholders (those who held the shares on the ex-div date) on the payment date.
Sometimes dividend payments are complicated by currency issues - for example some companies will announce their dividends in other currencies (US dollars or Euros) if that is their main trading currency and the currency conversion rate will be announced at a later point after the ex-dividend date to let shareholders know the amount paid in GB pounds.
Some dividends can also be paid as scrip dividends. This involves payment in further new shares rather than in cash. A later announcement will give information on the share price that such additional shares are "bought" at for the scrip dividend. Many brokers allow automatic dividend reinvestment which means that dividends received are automatically used to purchase more shares. Technically this is not a scrip dividend as it is not done by the company paying the dividend but is instead done by the broker you hold the shares through. However for the shareholder it accomplishes the same goal of increasing the number of shares held instead of receiving cash income.