The Dividend Investor. Rodney Hobson
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are likely to return to normal the following year.
Dividends declared in foreign currencies
Foreign-based companies and those with overseas operations may declare their results in a foreign currency, most likely US dollars or euros. This can make sense if most of their income and expenditure is priced in that currency.
Some UK companies present their results in dollars, particularly those in the oil industry or mining, where products are priced in the American currency.
European companies will normally declare their results in euros, although they may use pounds if their shares are listed in the UK. Otherwise the international currency is the US dollar.
The dividend will still be paid to you in pounds sterling but the amount will depend on the prevailing exchange rate. It follows that dividends from these companies tend to be more erratic as exchange rates fluctuate. When the value of the pound falls you do better; when the pound rises your income is reduced.
Another drawback is that foreign companies will operate within different political and legal systems. This is particularly relevant if you choose an overseas company with its shares quoted on AIM, where the regulatory framework is less rigorous.
Nevertheless, a willingness to invest in companies declaring their results in dollars or euros will widen your potential range of investments and spread your risk.
Key points
To be able to pay regular dividends a company must generate profits and cash.
Dividends are in effect paid out of what is left over after all other commitments have been met.
The dividend is decided by the board of directors, usually following the recommendation of the finance director.
Chapter 2. The Dividend Timetable
Payment frequency
Dividends are normally paid twice a year but they may be paid four times a year or, more rarely, once a year.
Frequency of payment is not particularly important in itself as long as the company maintains a regular pattern. If you want dividends to live on, then companies paying four times a year give you a smoother flow of income.
However, finding companies making steady, reliable profits is more important than looking for ones that make more frequent payouts.
Once-a-year dividend payments
This is extremely rare. A company making just one annual payment is probably very small and is trying to save money by reducing administrative costs. You should be more cautious of such a company as you will want to be satisfied that it has adequate financial resources.
Most dividend investors would prefer a steady stream of dividends throughout the year rather than have them lumped together, although having just one company that pays a single dividend in your portfolio should not be too much of a distortion overall.
One point to bear in mind is that other investors will be wary of such companies so they may be comparatively cheap to buy.
Twice-a-year dividend payments
This is the norm for the UK. One dividend, the interim dividend, is paid after the half-year results are announced. The second dividend, the final dividend, is paid after the full-year results are in.
Table 2.1 gives some examples of companies with financial years to the end of March 2011 paying two dividends a year.
Table 2.1– Sample dividend payments for UK companies
In each case the final dividend is substantially higher than the interim although the proportions vary. Retailer Marks & Spencer’s interim is more than half the size of the final while telecom giant Vodafone’s is just under half and chemicals group Johnson Matthey is closer to a 1:3 ratio.
Four-times-a-year dividend payments
International companies such as oil majors and pharmaceutical groups are more likely to pay quarterly dividends, as are foreign-based companies. Quarterly accounts are the norm in the United States so you will often find that companies producing their results in US dollars rather than sterling pay quarterly dividends.
These companies sometimes refer to the final dividend as the fourth interim dividend. If you see an interim dividend declared for the fourth quarter, do not expect another, final, dividend on top. It has been called an ‘interim dividend’ so that it can be paid without waiting for the approval of shareholders at the AGM.
Table 2.2 gives examples of companies paying four dividends a year.
Table 2.2 – Sample dividend payments for UK companies
These three companies all have international operations including interests in the United States. Two of them, one bank(HSBC) and one oil company, declare their results and set their dividends in US dollars while Barclays retains its Britishness with results and dividends in sterling. The figures given are for the 2010 calendar year.
We can see that they each have a different attitude to how the dividend should be split between the four payments:
Barclays has decided to make the final dividend more than double the size of each of the three interim dividends.
HSBC has a higher final dividend than the interim dividends but one that is only 25% greater than each interim.
Shell makes four equal payments – in this instance changes in the £/$ exchange rate meant that the final dividend was lowest in sterling terms.
How dividends are weighted between interim and final
There are no hard and fast rules as to how much of the total dividend should be paid at the interim stage and how much should be held back for the final.
Some companies, such as package holiday suppliers and some retailers, depend heavily on a particular time of year. They tend to put the better trading period into the second half, thereby seeing the results for the full year before deciding on the size of the final dividend.
As a rough guide, companies making two payments a year tend to pay one-third of the total at the halfway stage and two-thirds at the final stage. Companies paying four dividends a year usually spread the payments more evenly and may actually make four equal payments.
One should not draw inferences from the differing policies regarding the weighting of the dividend. What matters is that the company pays them, and pays according to a consistent policy year by year.
When you get paid
Dividends are not paid immediately the accounting period ends. It can be several months before you get your money. Table 2.3 covers five companies picked at random from those with a financial year ending on 31 December.
The list is in order of the announcement, in early 2011, of the full-year results for 2010. The dividend referred to is the final dividend.
Table 2.3 – A sample of key dividend dates
Source: Individual company announcements
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