First of all, we should define what a dividend is. The answer is very simple. Companies can invest their profits in business development and financing development projects, and part of the profits – as a kind of reward – can be paid to their loyal owners.
One way to do this is to pay dividends, and there are examples where part of the profits is paid to shareholders by attributing a certain amount of shares to them (mostly in Western European countries). All this means that those who invest in shares on the stock exchange, in addition to earnings on the exchange rate difference, can make a profit based on the distribution of company profits – through dividends.
The sum paid to company members is distributed in proportion to their ownership share (number of shares they own).
The proposal of the amount for payment is given by the Board of Directors, and the final decision is made by the General Meeting of Shareholders.
What Is the Dividend Payout Ratio Calculator?
Dividend Payout Ratio Calculator is a simply-made tool that, as its name says, helps to compute the dividend payout ratio.
Formula: How Dividend Payout Ratio Is Calculated?
Dividend payout ratio = Total dividends / Net income
The formula is pretty simple, and even simpler to use, which you can see in our example down below:
| Total Dividends | $2,000 |
| Net Income | $10,000 |
Dividend payout ratio = 2000 / 10,000
Dividend payout ratio = 20%
The Dividend and Profits
The dividend represents the payment of profit made by a legal entity through operations. The profit is the difference between expenses and income determined in the financial report of the company. Taxable profit is the profit adjusted for higher non-tax-deductible expenses or lowered for non-taxable income. Usually, it does not differ drastically from the profit shown in the company’s financial report.
Profits determined in this way are taxed at a certain rate. In accordance with the amount of income tax for the previous year, tax advances are paid on a monthly basis. The members of the company have the right to the payment of dividends to distribute the profit realized by the business in the previous business year.
In the case of a limited liability company, the dividend refers to the distribution of the realized profit to the members of the LLC following the founding act, while in the case of a joint-stock company it refers to the shareholders’ right to share in the profit. When the realized profit is distributed for the payment of dividends to members of the company or shareholders, the decision on distribution must be made by the assembly.
The realized profit must first be used to cover the loss from previous years (if any) and then used for legal reserves. If it remains, part of the profit can be distributed for:
- Statutory reserves
- Dividend
- Payment to employees
How Does the Dividend Work When It Comes to the Law?
Members of the company (shareholders) have the right to dividend payment, based on the decision on the distribution of the company’s profit, which is adopted by the assembly at the company’s session. At the company’s meeting, it determines the amount of dividend that will be paid to members of the company and shareholders. It also affects a decision on how dividend payment is made, which defines the deadline for payment.
Members of the company must be notified of the decision on dividend payment (notified by the company), no later than 15 days from the date of its adoption. Based on the decision on the payment of dividends (decision on the payment of profits), dividends can be paid to members of the LLC or shareholders in two ways:
- In cash, or
- In the shares of the company.
The payment of dividends to individuals (both residents and non-residents) is taxed at a rate of 15% on the gross amount of the dividend because the dividend distributed to the individual is considered capital income. In the case of dividend payment to a domestic legal entity, no dividend tax is calculated or paid.
In the case of payment to a foreign legal entity, a tax rate of 20% is applied. The tax rate may be different for foreign natural and legal persons only with the application of an international agreement on the avoidance of double taxation.
In summary, the tax treatment of dividend payments consists of:
- The corporate income tax rate
- Dividend tax, when paid to individuals, residents, and non-residents
- A tax on the basis of dividend payment to a foreign legal entity
Lower tax rates on dividend payments can be only if it is regulated by an international agreement on the avoidance of double taxation with certain signatory countries. The interim dividend can be paid if:
- It is confirmed in the reports on the company’s operations and the financial results that the company has made a profit, as well as if the available funds of the company are sufficient for the payment of dividends,
- The amount of the dividend is not higher than the total profit realized after the end of the previous business year, which is increased by the amount of undistributed profit and reserves, and reduced by the determining losses and the amount entered in reserves.
How Often Do Companies Pay Dividends?
It primarily depends on the business policy and corporate culture of the company itself. In some Eastern European countries, it is common for dividends to be paid after the end of the business year, in the next six months. The payment date is determined in advance and this information is delivered to all shareholders in a timely manner.
In contrast, in Western Europe, it is common for companies not to wait until the end of the business year, but before the regular annual dividend, before the end of the year, to pay the so-called advance dividend. Of course, there are exceptions.
At the same time, in the United States, the culture of dividend payment is even more sophisticated, namely, most companies in America will pay the dividend quarterly. So, shareholders can count on four payments during the year, which encourages them to think and invest in the long run.