Here at Shmoop, we don’t let Frank do too much. He’s the kind of guy who always jams the copier or always spills coffee all over the important contracts. Anything goes wrong, we say it got “franked.”
Luckily for you dividend recipients, our Frank has nothing to do with a franked dividend. Instead, it’s a tax policy meant to prevent dividends from getting taxed twice. (Most prominently in place in Australia.)
A company earns a profit for the year. It wants to return some of the profit to its shareholders. So, it wants to issue a dividend. Meanwhile, the company’s profits are taxed. Once it pays its tax bill, it uses its remaining after-tax profits to pay for the dividend. Without the franked policy, the shareholders would then get taxed on the dividend they receive. Double taxation. The pot of money that makes up the company’s profits are taxed once as corporate tax, and then again when those funds get sent out as dividends.
Governments with franked dividends (like in Australia) want to avoid this. So they have the franked dividend policy. In this structure, the tax rate of the company paying the dividend helps inform the dividend tax paid by the shareholders who receive them. The government keeps in mind the taxes already paid on the money when determining the tax rate for the shareholders receiving the dividend.
Related or Semi-related Video
Finance: What is Dividend Yield?4 Views
finance a la shmoop what is dividend yield? ah dividends the sign of the truly
well-to-do company well when a company has nothing better to do with its cash
and it has bought all of the corporate jets it wanted put in fountains in the [Fountain of water appears]
executive suite bathrooms and offered massage and dog therapy to all of its
employees it can then at its own discretion pay a dividend to its common
shareholders of record common shareholders yep that's who gets
dividends if you're an employee at a company and got say a bunch of stock [Employee stood beside company]
options when the company signed you you don't get dividends unless you buy out
your stock options and turn them into actual shares or common stock yeah well
dividends get paid quarterly in almost all companies in the US and companies
typically "declare" what their dividend will be a year or two or
three in advance if they can Wall Street does not like surprises so Daddy [Wall Street appears]
Warbucks rifles has made Bank in this neo zombie apocalypse and after buying
all of the anti zombie spray it ever wanted along with the jets and fountain
and doggy meditation classes well the company has extra cash it plans to [Dividends by a company building]
dividend out that cash on a regular basis and just like most companies
it has forecasted earnings three or four years or more into the future and this
dividend payout will be some relatively modest percentage of earnings like if
earnings will be something like 50 million then 70 million then 90 million
x3 years while the dividend might be declared as 25 million dollars a year [Dividend payments appear]
while doing the math here that'd be a 50% of earnings payout ratio in year one
but if they keep the dividend flat and don't raise it well it would just be
then twenty five over seventy or thirty six percent payout in year two and if
they still keep it flat in your three well it would just be a 25 over 90 there
that's a 28 percent payout and in real life odds are good they'd raised their
dividend if their earnings performance was you know this good [Thumbs up appears]
good performance right so what then is the dividend yield here to investors who
own a share of common stock well if the stock was trading for 40 bucks a share
and the dividend was 60 cents than the dividend yield would be 60 over 4000 or
0.6 60 cents there over the 40 bucks or 1.5 percent if the stock ran up to 60
bucks a share and the yield remained 60 cents well than the yield would be one
percent right 60 over 6,000 there yeah and if the stock tanked to be just 10 [Stock plot line crashes]
bucks a share and the dividend was still 60 cents a share the yielded be 6
percent so you can imagine how high dividend yields kind of cushion the
downside of stock like getting 6% it's pretty safe you know people are gonna be
happy to just collect your divvy right all right well that's yield a la
dividend and what should you do with the few bucks you'll make each month from [Man discussing dividends]
your dividends well you might want to stock up on that zombie spray in case
that things go awry [Person spraying zombie with anti zombie spray]
Up Next
What is Dividend Coverage/the Dividend Payout Ratio? The Dividend Cover ratio is the factor by which a company can overpay its dividend when its ne...
What are Dividends: Declaration date, Dated date, Pay date, Effective date, Ex-distribution date, Ex-Date, and Reset date? Dividends are sums of mo...
What are dividends, and how do they affect stock prices? Dividends are a portion of retained earnings that are remitted back to shareholders pro ra...