Defined on digopaul, the dividend is the profit distribution of a stock corporation. In Section 174, Paragraph 2, Number 2, the Stock Corporation Act explicitly speaks of an amount to be distributed. Shareholders have no legal right to receive a dividend. The amount is set anew each year depending on the profit of the stock corporation and proposed by the management board to the general meeting. A simple majority is sufficient for the proposal to be accepted. Payment is usually made on the day after the Annual General Meeting. For the first time in 2014, a company listed in the DAX offered its shareholders the option to purchase new shares as an alternative to dividend payments. The aim was to keep the company’s liquidity by non-payment and at the same time to carry out a capital increase.
- The value of a share is not only expressed by the daily market price, but also by how high the dividend yield is.
- Dividends are investment income that is charged with the withholding tax of 25 percent plus solidarity surcharge and possibly church tax.
- The amount of the dividend payment also provides information about how solidly a company is positioned.
- Holders of preference shares typically receive a higher dividend than holders of ordinary shares.
The dividend yield
The value of a share is not only expressed by the daily market price, but also by how high the dividend yield is. This sets the dividend in relation to the price. Assume that the price of a share on day X is 50 euros and the expected dividend is 2 euros per share. The dividend yield is then 2 * 100/50 = 4 percent. This figure shows that a high dividend does not necessarily have to be more profitable than a low dividend, as the price that has to be paid for it, the price of the stock, has a significant influence on the return.
Taxation of the dividend
Dividends are investment income that is charged with the withholding tax of 25 percent plus solidarity surcharge and possibly church tax. For sole proprietorships and partnerships, the partial income method applies to taxation. Corporations that have a stake of at least ten percent in a company can in fact receive dividends tax-free. Only five percent have to be taxed as non-deductible business expenses.
The dividend as an indicator of the company’s strength
The amount of the dividend payment also provides information about how solid a company is. Before a decision can be made, the management must examine the extent to which the income is sufficient to be able to make future investments without borrowing, to make interest payments or to build up reserves. Only when these figures have been determined can a decision be made about the amount of the dividend payment. If this is nevertheless high, it can be concluded that the stock corporation is quite well positioned or that there are no foreseeable investments or acquisitions pending. However, there is also an example of the opposite. Apple’s founder, Steve Jobs, has refused to pay a dividend for years in order to have the necessary liquidity for acquisitions and investments.
Preferred stocks with higher dividends
Not all shares in a company receive the same dividend. Holders of preference shares typically receive a higher dividend than holders of ordinary shares. For this, preference shares are excluded from voting rights. The price of a share also includes the amount of the dividend to be paid. If the amount of the dividend has been approved by the Annual General Meeting, but the dividend has not yet been paid, the price of the share is displayed in the price displays adjusted for the dividend. The abbreviation “Ex Div.”, Ex dividend, is found after the share price.