Dividend
A dividend is a share of a company's profits paid to its shareholders.
Published Monday 22 June 2026
Table of contents
Key takeaways
- A dividend is a portion of a company's profits distributed to shareholders, typically as cash but sometimes as additional shares or other assets.
- In Australia, franking credits can reduce or eliminate the tax you pay on dividend income by accounting for company tax already paid.
- 4 key dates determine when you're entitled to a dividend and when you'll receive payment: declaration, ex-dividend, record, and payment dates.
- Dividends provide regular income from your investment, while capital gains come from selling shares at a higher price than you paid.
What is a dividend
A dividend is a payment a company makes to its shareholders from its profits or reserves. When a company earns more than it needs to reinvest in the business, its board of directors can choose to distribute some of those earnings to the people who own shares in the company.
As a small business owner, you might receive dividends if you hold shares in other companies, or you might pay dividends to shareholders in your own company. Understanding how dividends work helps you make informed decisions about your business finances and personal investments.
Types of dividends
Companies can distribute profits to shareholders in several ways. The type of dividend a company pays depends on its financial position and strategy.
- Cash dividends: the most common type, where shareholders receive a direct cash payment per share they own
- Stock dividends: shareholders receive additional shares in the company instead of cash, increasing the total number of shares they hold
- Property dividends: shareholders receive non-cash assets such as physical goods, real estate, or shares in a subsidiary company
- Special dividends: one-off payments made outside the regular dividend schedule, usually when a company has excess cash from a strong period or an asset sale
Why companies pay dividends
Companies pay dividends to reward shareholders and signal financial stability. A consistent dividend history can attract investors who are looking for reliable income from their investments.
Mature, established companies with steady profits are more likely to pay regular dividends. Younger or fast-growing companies tend to reinvest their earnings back into the business to fund expansion rather than distributing them to shareholders.
Implications of issuing dividends
Paying dividends affects your company's finances in several ways. Here are the key considerations for business owners.
- Dividends reduce your company's retained earnings, leaving less cash available for reinvestment or covering unexpected costs
- Dividends create an expectation among shareholders; reducing or stopping payments can signal financial difficulty
- Dividends are not tax-deductible for the company paying them, unlike interest payments on debt
- Dividends can improve your company's reputation with investors and make it easier to raise capital in the future
Franking credits and dividend imputation
Franking credits are a feature of Australia's dividend imputation system that prevents company profits from being taxed twice. When an Australian company pays tax on its profits before distributing dividends, it can attach franking credits to those dividends to reflect the tax already paid.
The dividend imputation system means you, as a shareholder, get credit for the company tax that's already been paid on your dividend income. This can reduce the amount of personal income tax you owe, or even result in a tax refund if your marginal tax rate is lower than the company tax rate.
Dividends fall into 3 categories based on their franking status.
- Fully franked: the company has paid the full 30% (or 25% for base rate entities) company tax on the profits used to pay the dividend; you receive a full franking credit
- Partially franked: the company has paid tax on only a portion of the profits; you receive a partial franking credit for the taxed amount
- Unfranked: no company tax has been paid on the profits used to pay the dividend; you receive no franking credit and pay tax on the full dividend amount at your marginal rate
You'll need to include your dividend income and any franking credits in your tax return. The Australian Taxation Office (ATO) uses this information to calculate how much personal tax you owe on your dividend income.
Key dividend dates
4 key dates determine your eligibility for a dividend payment and when you'll receive it. Understanding these dates helps you plan your cash flow and investment decisions.
- Declaration date: the date the company's board of directors announces it will pay a dividend, including the amount per share and payment schedule
- Ex-dividend date: the cut-off date for buying shares and still receiving the dividend; if you buy shares on or after this date, you won't receive the upcoming payment
- Record date: the date the company checks its register to confirm which shareholders are eligible for the dividend; this is typically 1 business day after the ex-dividend date
- Payment date: the date the dividend is actually paid into your account
Share prices often drop by approximately the dividend amount on the ex-dividend date. This happens because new buyers on that date aren't entitled to the upcoming payment, so the share's value adjusts to reflect this.
The dividend payment process
Dividends are paid on a regular schedule determined by each company. Most Australian companies pay dividends either semi-annually or annually, though some pay quarterly.
Companies may issue 3 types of dividends during their financial year.
- Interim dividends: paid partway through the financial year, usually after the company releases its half-year results
- Final dividends: paid after the end of the financial year, once full-year profits are confirmed and approved at the Annual General Meeting (AGM)
- Special dividends: one-off payments made outside the regular schedule when a company has surplus cash or completes a major transaction
Your company's constitution and the Corporations Act set out the rules for declaring and paying dividends. A company can only pay dividends from its profits and must remain solvent after the payment.
Dividend reinvestment plans
A dividend reinvestment plan (DRP) lets you automatically use your dividend payments to buy more shares in the company instead of receiving cash. Many Australian listed companies offer DRPs to their shareholders.
DRPs can help you grow your investment over time through compounding. Each dividend payment buys you more shares, which then generate their own dividends, gradually increasing your total holding without requiring you to invest additional cash.
Some companies offer shares through their DRP at a small discount to the current market price. Keep in mind that even though you don't receive cash, reinvested dividends are still treated as taxable income in Australia.
How dividends are calculated
Your dividend payment is calculated based on the number of shares you own and the dividend amount per share declared by the company. The formula is straightforward.
Dividend received = dividend per share x number of shares owned
For example, if a company declares a dividend of $0.50 per share and you own 1,000 shares, your total dividend payment would be $500.
Companies set their dividend per share based on factors such as total profit, how much they want to retain for reinvestment, and their target payout ratio. The payout ratio is the percentage of net profit a company distributes as dividends.
Dividend calculation example
Here's a worked example showing how dividends flow from company profits to shareholder payments.
Waldo Manufacturing earns a net profit of $200,000 for the year. The board of directors decides to distribute 40% of the profits as dividends, giving a total dividend pool of $80,000.
Waldo Manufacturing has 500,000 shares on issue. To find the dividend per share, divide the total dividend pool by the number of shares.
Dividend per share = $80,000 / 500,000 = $0.16
If you own 10,000 shares in Waldo Manufacturing, your dividend payment would be calculated as follows.
Your dividend = $0.16 x 10,000 = $1,600
If the dividend is fully franked at the 30% company tax rate, you'd also receive a franking credit of approximately $685.71 ($1,600 x 30/70). This franking credit offsets the personal income tax you owe on the grossed-up dividend amount.
Dividends vs capital gains
Dividends and capital gains are 2 different ways you can earn a return from your investments. They suit different financial goals and risk profiles.
Dividends provide regular income while you continue to hold your shares. You don't need to sell anything to receive this income, making dividends a popular choice for investors who want a steady cash flow from their portfolio.
Capital gains, on the other hand, are the profit you make when you sell shares for more than you paid for them. You can learn more in the capital gains tax guide. This approach relies on share price growth over time. You only realise the gain when you actually sell, and in Australia, capital gains held for more than 12 months may qualify for a 50% discount on the tax you owe.
Many investors use a combination of both strategies. Dividend-paying companies can also deliver capital gains if their share price rises over time.
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FAQs on dividends
Here are answers to common questions about dividends in Australia.
What is a franked dividend?
A franked dividend is a dividend that comes with a franking credit, which represents company tax already paid on the profits being distributed. The franking credit can reduce or offset the personal income tax you owe on that dividend.
How often are dividends paid in Australia?
Most Australian companies pay dividends semi-annually, with an interim dividend at the half-year mark and a final dividend after the end of the financial year. Some companies pay quarterly or annually.
Do all companies pay dividends?
No, not all companies pay dividends. Growing companies often reinvest profits instead, and a company can only pay dividends when it has sufficient profits and remains solvent after the payment.
How do dividends affect share prices?
Share prices typically drop by approximately the dividend amount on the ex-dividend date. This adjustment reflects that new buyers after that date won't receive the upcoming dividend payment.
Related terms
Explore these related glossary terms to build your understanding of dividends and business finance.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.