Introduction to Dividends for Beginners

What is a dividend?

 

A dividend is the distribution of a company’s profits (current earnings or accumulated profits) to its shareholders. In Iraq, the decision to distribute dividends is made during Annual General Meetings (AGM) by the company’s Board of Directors (BoD). In the country, dividends are generally distributed as cash which is called “cash dividend”.

 

What does dividend mean?

 

A dividend is a portion of a company’s net profit distributed to shareholders as a reward. In Iraq, dividends are primarily paid in cash.

 

What are dividend stocks?

 

Dividend stocks are shares in companies that pay a portion of their profits as dividends to shareholders on a regular basis. Most dividend stocks are listed on stock exchanges, although unlisted companies can also distribute dividends.

 

Why are dividends important for investors?

 

Dividends are important for investors because they provide tangible returns that can be reinvested or withdrawn to meet cash requirements. If an investor buys shares of companies that distribute dividends regularly, they view these regular payments as:

 

• A consistent income stream, which is especially attractive to those seeking regular cash flow without having to sell their investments. This is important because, for capital gains, you need to sell the stock, but for dividend returns, you can continue holding the stock and receive regular dividend payments.

 

• An indicator of financial health, as companies that consistently pay dividends are often considered financially stable. This may also signal strong earnings and good management practices.

 

• A contributor to total return, as reinvesting dividends can lead to compound growth over the long term. After receiving the dividend, it is up to the investor whether to withdraw it for living expenses or reinvest it in stocks to foster further portfolio growth.

 

• A way to reduce risk, since dividend-paying stocks tend to be less volatile than non-dividend-paying ones. Additionally, during market downturns, dividends can partially offset capital losses, making them more attractive during uncertain times.

 

• A signal of confidence in future cash flows, because when a company cuts its dividends after regular payments, it may be seen as a sign of financial trouble. However, if the company uses the profits for expansion rather than only for current liquidity needs, it might also be viewed as a positive development.

 

–A hedge against inflation, but only if the company increases the dividend paid per share every year. If the increase in dividends outpaces inflation, dividends will provide a real return.

 

In short, investors who seek dividend-paying stocks view them as long-term, stable, and less risky investment opportunities.

 

What are the different types of dividends?

In international markets, there are different types of dividends, including cash dividends, stock dividends, property dividends, scrip dividends, liquidating dividends, special dividends, bond dividends, and preferred dividends. In Iraq, the most common method of distributing dividends is through cash dividends.

 

How are dividends calculated?

 

In the Iraq Stock Exchange, when a company announces that it will distribute a 25% cash dividend, it means the company will distribute an IQD0.25 cash dividend per share. As a result, if you own 200,000 shares of this company, you will receive a total cash dividend of IQD50,000 (= 200,000 × IQD0.25)

 

What is dividend income? What is the difference between dividend income and dividend return?

 

Dividend income refers to the actual cash that an investor receives from dividends, expressed in Iraqi Dinars for companies listed on the ISX, while dividend return refers to the percentage return from dividends based on the investment amount.

 

How do companies distribute dividends to shareholders in Iraq?

Aws will send

• Declaration Date: This is the date when ISX-listed companies discuss and approve dividend distributions at their annual general meetings (AGMs). Afterward, the ISX announces the amount of the dividend to be distributed.

• Ex-dividend Date: In Iraq, the ex-dividend date is the last day the stock is open for trading before the Annual General Meeting (AGM). If you buy shares on or after this date, you will not receive the dividend.

• Record Date: This is the date on which a company reviews its list of shareholders to determine who is eligible to receive the dividend.

• Payment Date: In Iraq, the payment date is the period when companies distribute dividends. The companies announce this through the ISX, and shareholders are invited to receive their dividends. (You can follow all these announcements through Rabee Securities’ Daily and Weekly Reports prepared for investors)

 

How are dividends taxed?

Iraq does not impose withholding tax on dividends, provided that the company distribute dividend from the net profit which company already paid tax on it. 

 

What are the tax implications for different types of investors for dividend income?

In Iraq, when you buy shares and receive dividends from that investment, you do not pay tax. Whether you are an individual or a corporate investor, you do not pay tax on your dividend income.

 

What factors do companies consider when deciding to pay dividends?

Companies evaluate various financial, strategic, and market-related factors when deciding whether to pay dividends and how much to pay. The major considerations in the dividend distribution decision are as follows:

• Financial health of the company: Companies need sufficient profitability to fund dividend payouts, strong and stable cash flows to ensure dividend payments do not create cash flow problems for operational needs, and manageable debt obligations.
• Business growth opportunities: During expansion periods, companies may prefer to reinvest their profits into the business instead of distributing them.
• Competitors’ dividend policies: These might influence a company’s decision about how much to distribute as dividends in order to remain attractive to investors.
• Economic conditions: During uncertain periods, companies may choose to retain earnings instead of distributing them to safeguard against downturns.

 

How does the company’s financial health impact dividend payments?

The financial health of a company determines whether it is able to pay and sustain dividend payments. Companies with healthy financial metrics, such as profitability, strong cash levels, low debt obligations, and substantial reserves (accumulated profit), can reward shareholders with dividends without negatively impacting operations. On the other hand, financial weaknesses or instability may cause companies to refrain from distributing dividends or reduce the amount they distribute.

 

What are the common dividend policies followed by companies?

There are several dividend policies that companies follow based on their financial health, growth plans, and shareholders’ expectations. Below are the common dividend policies:

 

• Stable Dividend Policy: Companies that follow this policy pay a consistent dividend amount each year.
• Constant Payout Ratio Policy: Companies that follow this policy pay a fixed percentage of earnings each year.
• Residual Dividend Policy: Companies following this policy pay dividends from the amount remaining after funding all investment opportunities and capital requirements.
• Hybrid Dividend Policy: Companies with this policy combine elements of both stable and residual policies. They pay a stable dividend amount and may provide additional payments during years of strong earnings.
• Irregular Dividend Policy: Companies that follow this policy pay dividends occasionally, typically when the company has surplus cash or extraordinary profits.
• No Dividend Policy: Some companies do not distribute any dividends and reinvest all profits back into the business. These companies do not have a formal dividend policy.

 

How do industry trends and economic conditions affect dividend distributions?

Industry trends and economic conditions have a direct effect on a company’s dividend distributions by impacting its financial strength. Companies that distribute dividends adjust their dividend policies by considering changes in external factors, particularly in Iraq, which are mainly economic, political, and security situations. 

 

How do regular dividends differ from special dividends?

Regular dividends are consistent and recurring payments. These types of dividends reflect the company’s sustained profitability and commitment to shareholders. On the other hand, special dividends are irregular or one-time payments typically made when the company generates an extraordinary profit. 

 

What is the difference between qualified and non-qualified dividends?

In Iraq, there is no distinction between qualified and non-qualified dividends, as this classification is specific to the United States tax system and relates to U.S. federal tax law. Furthermore, there is no tax on dividends in Iraq.

 

FAQ

 

1.How often are dividends typically paid?

Companies listed on the Iraq Stock Exchange (ISX) make dividend distribution decisions at their annual general meeting (AGM); thus, ISX-listed companies typically pay dividends annually.

 

2.What happens if a shareholder sells their shares before the ex-dividend date?

If a shareholder sells their shares before the ex-dividend date, they will not be eligible to receive dividends. To receive dividends, shares must be held during the AGM, when the dividend distribution decision is made.

 

3.What type of dividend is best?

Each type of dividend policy has its advantages and disadvantages. The ‘best’ dividend policy depends on the company’s financial health and the investor’s goals. For income-oriented investors, regular dividends are the best income-generation tool, making a stable dividend policy the most suitable. For growth-oriented investors, special dividends or no dividends might be considered the best, as these policies indicate a focus on expansion.

 

4.What is an example of a dividend?

Here is an example of how to calculate the amount of dividend an investor will receive:

Company: Company A.

Dividend Payment: Company A decided to distribute an annual dividend of IQD2.00 per share.

The Shares Owned by an Investor: 200,000 shares

Total Dividend an Investor will Receive: IQD400,000 as a dividend payment (200,000 shares x IQD2.00 per share).

 

5.What stocks pay dividends

On the Iraq Stock Exchange (ISX), there are companies that pay regular or irregular dividends, as well as those that do not pay dividends. Companies that distribute dividends primarily operate in the banking, telecom, industry, agriculture, hotels & tourism, and services sectors. (To access the historical dividend distribution of ISX-listed companies, please refer to the Dividend Report (ISX-listed Companies), published quarterly by the Research Department of Rabee Securities.)

6.What stocks pay the highest dividends?

Instead of looking at which companies pay the highest dividend per share, to calculate the highest return that will be obtained, investors should look for the highest dividend yields offered by the ISX-listed companies. (To reach out the “Top-10 Dividend Yields (%) in the Last Twelve-Months” on the ISX, please refer to the Dividend Report (ISX-listed Companies), published quarterly by the Research Department of Rabee Securities.)