Game newsletter
Understanding dividends
First of all let’s take a look at what a dividend is. A dividend is
a payment (usually out of profits) that a company may pay to its
shareholders.
Companies pay dividends because investors have bought
shares in their company instead of putting that money in the
bank or buying other shares or property. By paying dividends the company makes itself more
attractive to investors.
Companies typically like to keep a consistent pattern to their dividend payments as they know a lot
of investors, especially retirees, rely on dividends for income. A lot of investors look at what a
company has done in the past to try to get a feel for likely future dividend payments. They can also
get more of an idea of what is likely to happen by paying attention to announcements the company
makes to the market as well as what company analysts might say.
Companies such as the big banks and Telstra have a history of paying good dividends so a lot of
investors like these stocks. It is important to remember however, that a dividend is not guaranteed,
as a company may pay a dividend one time but not the next. Or they may change the amount of
the dividend. If a company experiences a significant drop in profits you might expect the next
dividend to be lower or in some circumstances no dividends paid at all.
You can watch this video to help you understand more about dividends.
So how do you receive a dividend?
Companies need to keep track of who owns their shares so they can pay dividends out to
shareholders – therefore they need a cut­off date. If you own the shares before the cut­off date
(the ex­date) you will receive the dividend. If you buy the share s after the ex­date you will miss out
on that dividend. You can find all of the dividends coming up in the Game and the ex­date on the
Dividends plus page.
In the real world the dividend will be paid into a shareholders nominated bank account. In the
Game, this dividend gets paid on the ex­date into your Game account as cash. (This is a little
different to the real market ­ in the real market, to receive a dividend you still need to own the
shares before the ex­dividend date; however, you are paid some time later on the payment date.)
What happens to the company’s share price?
A lot of shares fall in price by the dividend amount the day they go “ex­dividend. Why does this
happen? Suppose I say to you, “you can buy these shares for $5.00 plus you will get a dividend of
50 cents.” How much are you really paying? $4.50 ­ because you are getting 50 cents back.
So if that is what the market is valuing the company at ($4.50 plus a 50 cent dividend) what do you
think people will be prepared to pay for the shares if they aren’t eligible for the dividend? Most
likely the answer would be $4.50.
This is why a lot of shares fall on the “ex­dividend date. Sometimes companies don’t fall in price
after they go “ex” and this is referred to as “holding their dividend”. It is a good outcome for you if
you own the shares, get the dividend and find that the shares don’t drop by the dividend amount
after they go “ex”.
What is franking all about?
Franking is to do with tax. When a company pays a dividend, it has often already paid tax on that
money. If this is the case then the shareholder is given a concession called a franking credit which
shows that some tax has already been paid on the dividend and the shareholder will pay less tax
as a result. We don’t take tax into account in the Game so we ignore franking but for investors
franking credits can make dividends even more attractive.
Is your strategy to invest in shares with dividends?
In the Game, one of your strategies might be to invest in those companies that have a dividend
coming up, in order to take advantage of the additional cash.
Read what a Game player said about their dividend strategy...
Hannah said... “A technique I used was to regularly check upcoming dividends, so I could invest in
some of these companies and increase my portfolio value, but sell the shares off again if it looked
like the business could take a downturn…Towards the end of the Game I tried to stick to the
companies I had already invested in so that they had the time to progress, giving me a higher
portfolio value. …”
Because dividends give you more money in your portfolio…you may have chosen to do the same
as Hannah and invest in those companies that have dividends coming up. Now there is nothing
wrong with this, however the thing to be aware of (as mentioned above) is the fall of the share price
on the ex­date, so you would need to wait until the share price recovered from this fall in order to
take full advantage of the dividend.
So is a dividend worth chasing?
You can select a share based on its dividend. You might buy a “dividend stock” because you think
that people tend to pay more for shares that pay good dividends, but you need to consider more
than just the dividend. Companies can only continue to pay good dividends if they are doing well
financially so it is wise to also look into how the company is performing.
The indices and share price list has been updated for the period 12 March ­ 8 April (CSV
13KB). Here is the hot & cold stocks list for the week of 1 ­ 8 April (PDF 20KB).
Rankings: Anthony from Brisbane Boys College, QLD has jumped from 3rd into 1st place with a
portfolio value of $59,992. Deerys Dollars from Loreto College, VIC is in 2nd place on $58,522 and
only $24 behind is Paul Tran from Eynesbury Senior College, SA with a portfolio value of $58,498. Happy learning
The Games team
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