PAYING DIVIDEND

Paying Dividend

Paying Dividend

The dividend payment in practical terms a firm's dividend payment is important to its shareholders. It is part of the return which shareholders receive for their investment in the firm (Bajaj & Vijh, 2004, 193-219). The dividend payment is also a favoured method by which shareholders and investors estimate a firm's share value, where the value of a share is equal to the present value of the expected future dividend payments - the dividend valuation model Notice the tendency for the final dividend to be significantly greater than the interim - this is the common, financially prudent, approach adopted by most company boards (Bajaj & Vijh, 2004, 193-219).

Clearly directors will wish to be certain of how a company has performed for the year overall, before committing valuable cash resources to a dividend payment. Shareholders, depending upon the individual company's articles of association, may have the right to receive dividends in the form of fully paid ordinary shares instead of cash, if they so elect (Bajaj & Vijh, 2004, 193-219). Under such a plan shareholders can, if they wish, use the entire cash dividend to buy additional shares of the company in the market, usually at a competitive dealing rate. Dividend coverThe dividend cover ratio indicates the vulnerability, or the margin of safety, of dividend payments to a drop in earnings.

Notwithstanding the abolition of ACT, tax credits will continue to be available to individual shareholders resident for tax purposes in the UK, although the amount of the tax credit will be reduced to one-ninth of the amount of the net, or cash dividend - equivalent to 10 per cent of the gross dividend. Lower and basic rate taxpayers, as before 6 April 2006, will have no farther liability to tax on their dividends. Higher rate tax payers will, as before, be able to offset the tax credit against their liability to tax on the gross dividend (Bajaj & Vijh, 2004, 193-219). UK resident individual shareholders who are not liable to income tax in respect of the dividend will not generally be entitled to reclaim any part of the tax credit. Tax credits are no longer available to UK pension funds. Under legislation introduced in the Finance (No. 2) Act 2005, UK pension funds are not entitled to reclaim the tax credits on dividends paid to them by a company. Similarly, after 6 April 2006 tax credits in respect of dividends paid, which constitutes the income of a charity or venture capital trust, will not be repaid (Bajaj & Vijh, 2004, 193-219).

There is some speculation that, in the future, companies may increase their dividend distributions to compensate these investing institutions for the loss of their tax credits.Over time many theories on dividend policy, often controversial ones, have emerged (Healy & Palepu, 2004, 149-176). The central area of controversy has, and continues to be, concerned with whether or not there is a real connection between dividend policy and the market value of the firm (Healy & Palepu, ...