A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
For investors in companies paying a dividend, there is some terminology about dividend dates that is important to understand. Companies typically issue press releases regarding their dividend payments that include the payment terms, including the payment date and the record date. These press releases are governed by the listing requirements of the stock exchange so that there must be a clear understanding in the market-place as to who is entitled to receive the dividend declared.
This is the date that the company actually pays the dividend to shareholders who are eligible.
Any shareholders as of this date will get the most recent dividend. If you are buying a mutual fund and want to avoid getting the next dividend then wait until after the record date to buy it. If you are selling a mutual fund and want to avoid the dividend then sell it before the record date.
This is two business days before the record date – someone who buys the stock on this date or later will not get the dividend.
When entered on a person's tax return, the actual amount of dividends is "grossed-up" by a specified factor, depending whether it was an eligible dividend or not. The goal of this mechanism is to achieve tax integration between corporate and personal taxation, by giving the individual who is receiving dividends a credit for the tax already paid at the corporate level.
For eligible dividends, the federal dividend tax credit will be 16.4354% of your taxable amount of eligible dividends included on line 120 of your return. For other than eligible dividends, the federal dividend tax credit is 13.3333% of your taxable amount of dividends reported on line 180 of your return.
Foreign dividends do not qualify for the dividend tax credit. If you paid foreign taxes on your interest or dividend income, you may be able to claim a foreign tax credit when you calculate your federal and provincial or territorial taxes (see Line 405).
Impact of dividends on NAV (net asset value) of mutual funds
What happens to the dividends paid to the mutual fund by companies whose shares the mutual fund holds? Those dividends form part of the income of the mutual fund, and increase the fund's NAV. They are usually aggregated, the fund is paid its MER, and the remainder is then paid out to holders of the mutual fund in the form of dividends from the mutual fund.
What happens to the dividends paid out by the mutual fund to its unit holders? The NAV of the fund decreases by the amount of dividends paid out. Some unit-holders choose to DRIP, i.e. use the dividends to buy more units. The extra number of units just cancels out the drop in NAV, and the unit holder is left as before, except for some accounting.
- Investopedia, [http://www.investopedia.com/terms/d/dividend.asp Dividend definition, viewed June 18, 2012
- Dividend Dates, US Securities and Exchange Commission,viewed February 25, 2009
- TSX Company Manaul, D. Dividends and Other Distributions to Security Holders, viewed October 17, 2012.
- Canada Revenue Agency, Line 120 - Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations, viewed June 18, 2012
- Taxing Canadian dividends, Integration model, viewed October 17, 2012
- Canada Revenue Agency, Line 425 - Federal dividend tax credit, viewed June 18, 2012
- Canada Revenue Agency, Line 121 - Foreign interest and dividends, viewed June 18, 2012