A dividend is the part of a company's profit paid to shareholders. For many people, it is the most concrete benefit of owning shares, but the headline amount can be easy to misread. Understanding the payment dates, yield, payout ratio and tax helps you judge what a dividend is actually worth. This article is general education, not advice about any company.
What a dividend is
When a company earns a profit, some may stay in the business as reserves or funding for growth. The company can distribute the rest to shareholders. The amount paid on each share is the dividend per share.
The board of directors proposes a dividend, and shareholders usually approve it at the annual general meeting. Payment is never guaranteed. A company may pay one year and nothing the next, especially if profits are weak or a regulator requires it to retain more capital.
Most dividends are paid in cash. Some companies instead issue extra shares, often called bonus shares. Cash and bonus shares are different: cash leaves the company, while bonus shares leave the company's value unchanged and increase the number of shares each owner holds.
The four dates
Four dates determine who receives a dividend and when.
| Date | What it means |
|---|---|
| Declaration date | The company announces the dividend, usually after the annual meeting approves it. The announcement states the amount per share and how the payment will be made. |
| Record date | Everyone on the company's share register on this date is entitled to the dividend. For listed shares, the register is kept through the central securities depository. |
| Ex-dividend date | Exchanges usually set a date before the record date. If you buy on or after the ex-dividend date, you do not receive the upcoming dividend, because the trade will not settle in time for you to be on the register on the record date. If you buy before it, you do. |
| Payment date | The day the money is paid. It can be days or weeks after the record date. |
For each dividend, confirm these dates and the effect of settlement in the Ethiopian Securities Exchange's notices and trading manual. The details may differ from those on other exchanges.
How the money reaches you
For shares held through a licensed provider, the dividend may be credited to your bank account, paid through the provider or sent through the registrar. The method depends on the company and how your account was set up, so check when you open it.
Keep your contact and bank details current with your provider and the depository. Outdated details are a common reason shareholders miss payments. If an expected dividend does not arrive, contact your provider first and then the company's share registry. Keep a record of the dates you held the shares.
The key numbers
Dividend per share. The amount paid on each share, in birr.
Dividend yield. Dividend per share divided by the share price, shown as a percentage. If a share costs 200 birr and the dividend is 10 birr, the yield is 5 percent. The yield changes whenever the price changes, so it is worth stating the date of the price you used.
Payout ratio. Total dividends divided by profit for the same period. If a company earns 1,000 million birr and pays 400 million birr in dividends, the payout ratio is 40 percent. A ratio near 100 percent, or above it, means the company is paying out all of its profit or more. That may not be sustainable.
Dividend cover. Profit divided by dividends. It is the reverse of the payout ratio. A cover of 2.5 means profit was two and a half times the dividend.
Dividends and capital gains
Your total return combines the dividends you receive with any change in the share price while you hold it, known as a capital gain or loss.
The balance depends on your goals. An investor who needs income may favour regular payments. Someone with a longer horizon may accept lower dividends if the company reinvests profit and grows. The size of the dividend alone does not tell you whether the shares are a good investment.
When a company pays a dividend, its share price usually falls by about the same amount on the ex-dividend date because that value has left the company. The payment transfers value to the shareholder; it is not free money.
What to check before relying on a dividend
- Is the profit real and growing? A dividend funded from a one-off gain, or from reserves, may not repeat.
- Is there a track record? A first dividend tells you little. Several years of payments, with the payout ratio visible, tell you more.
- Is it covered? Look at the payout ratio over several years. Check that the company is not paying out more than it earns.
- Does the regulator limit it? Banks, in particular, must hold minimum levels of capital. A bank that needs to build capital may be asked or required to pay less. Our guide on how to analyze an Ethiopian bank explains the capital rules in more detail.
- Has management explained its policy? Annual reports often state how the board thinks about dividends. A clear policy is a good sign. A vague one is a reason to ask more questions.
- What does the company need the cash for? A company planning to raise capital, repay debt or expand may reasonably keep more of its profit.
Tax on dividends
Dividends are taxed in Ethiopia, and the rules depend on who you are.
PwC's published tax summary for Ethiopia states that dividends paid by resident companies to individual shareholders are subject to a 10 percent withholding tax, which is the final tax on that income. This means the company deducts the tax before paying you, and you do not normally pay further income tax on the same dividend. Dividends paid to non-residents are also subject to a 10 percent withholding rate, which a tax treaty may reduce.
Reinvesting dividends
Reinvesting means using the dividends you receive to buy more shares. Over many years this compounds, because the extra shares earn their own dividends and growth. Compounding needs time, a company that keeps paying, and a way to buy shares conveniently. In a market with few listed companies and limited trading, it may not always be easy to buy a small number of shares at a fair price. Our article on liquidity risk explains why.
Common mistakes
- Buying only for yield. A high yield can mean the price has fallen because the market doubts the dividend will continue.
- Buying just before the record date to collect the dividend. The share price normally adjusts, and you may owe tax on the dividend, so there is no free gain.
- Ignoring the tax. Look at the amount you actually receive after withholding.
- Assuming last year's dividend will repeat. Check profit, capital rules and the company's stated policy.
- Confusing a bonus share issue with a cash dividend. Bonus shares give you more shares but not more value in total.
- Not checking your details. Missed payments often come from outdated account or contact information.
Keep a record
For each holding, record the number of shares, the declaration, record and payment dates, the amount per share, the tax withheld, and the date and amount you actually received. It takes a few minutes each year and makes it simple to check the payout and to report your income.