What are dividends: the portion of profits that a company decides to distribute among its shareholders. We review their types, key dates and how they are taxed in Spain.
Understanding what dividends are is the first step for anyone thinking about buying shares. In simple terms, a dividend is the portion of profits that a company decides to distribute among its shareholders, that is, among those who hold its shares. Companies on the Spanish Stock Exchange distribute billions of euros each year for this reason, and that is why many investors take it into account before deciding where to place their money.
When a company closes its financial year with profits, it has two options. It can reinvest that money back into the business to grow or allocate part, or all, to reward its shareholders. This decision is not automatic. In public limited companies, the distribution must be approved at the general shareholders' meeting, upon proposal from the board of directors. Therefore, owning shares does not guarantee receiving dividends, as it all depends on what the company decides.
How they are calculated
The most common formula for determining the distribution is the pay-out, or fixed percentage, which involves allocating a percentage of the profit obtained in the year to shareholders. Let’s imagine a company that earns 200 million euros and agrees on a pay-out of 50%. In that case, 100 million would be distributed among its shareholders.
To find out how much corresponds to each share, that total is divided by the number of shares in circulation. If the company has 50 million shares, the dividend per share would be 2 euros. An investor with 10 shares would receive, in that scenario, 20 euros. The more shares one owns, the greater the payout.
This figure is also used to calculate the dividend yield, which results from dividing the dividend per share by the share price and multiplying by one hundred. Investors compare this indicator between companies, although it is advisable to read it with caution. If the share price falls, the yield may increase without the business improving.
Types of dividends
Depending on the timing and method of payment, there are several types. The interim dividend is paid as an advance before the financial year closes, and is calculated based on the company’s estimates of the final profit. The complementary dividend is paid once the annual results are presented and supplements the previous one.
There are also fixed dividends, which are established in advance as an annual amount regardless of the financial results. The extraordinary dividend appears when the company obtains income from sources outside its usual activity, such as the sale of a property. And the flexible dividend, known by its English name, scrip dividend, allows the shareholder to choose whether to receive it in cash or in new shares.
Additionally, there are other formulas. The stock dividend distributes additional shares instead of cash. The share buyback, on the other hand, involves the company purchasing part of its own shares to retire them. With fewer shares in the market, each shareholder's stake increases, which can push the share price up.
Companies also follow a dividend policy. Some opt for a constant annual payment per share, others for a percentage of profits, and others for the residual dividend, which is only distributed once planned investment projects, such as purchasing materials, hiring staff, or opening new offices, have been covered. Mature companies tend to distribute a significant portion of their profits, while those in expansion tend to reinvest almost everything.
Key dates to know
Receiving a dividend requires paying attention to several dates. The first is the declaration date, when the company announces the amount, payment date, and type of dividend. Then comes the record date, or record date, when the shares must be registered in the investor's name to be entitled to receive the payment.
There is one particularly important date: the ex-dividend date. This is the day from which the share trades without entitlement to the distribution, because that right has already been assigned to those who were shareholders before. Anyone buying on that day or afterwards will not receive the announced dividend. Finally, the payment date marks the day the money arrives in the account.
How they are taxed in Spain
In Spain, dividends are considered income from movable capital and are included in the savings base of the annual income tax return. They must be declared, and certain management and deposit expenses can be deducted from the total income.
When receiving, the entity usually applies a withholding tax, so the amount received is less than the gross amount. The percentage depends on the total income from savings obtained during the year, so it is advisable to review the current table before filing the return. Once the settlement is made, the tax authority adjusts the amount according to the taxpayer's overall investments, which can result in a refund or an additional payment.
What to consider before investing
Dividends are not the only way to obtain returns from shares. A company that does not distribute may be investing in growth, and if that growth works, the value of the share may rise. Therefore, choosing between seeking dividends or capital appreciation depends on each person's profile and their time horizon.
Before buying, it is advisable to review the investor profile and, if there are doubts, consult a specialized advisor to decide how much risk one is willing to take. Investing in shares can generate long-term income through dividend distributions, but the price of shares also fluctuates, and that is part of the equation from day one.
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