The dividend that a company pays to its shareholders is a distribution out of current profits net of tax; that is, after allowing for the corporation tax of up to 52% and any overseas taxes the company will have to pay on its profits. If in a given year it makes no profits it is unlikely to pay more than a token dividend. If profits are high it can pay more; if they are low it may have to pay less.


Assume that a company with a share capital of 2,520,000 ordinary 50p shares earns a gross taxable profit in a given year of £183,750. Assume also that the company will be liable to pay a sum of £95,550 to the Inland Revenue in corporation tax (tax is unlikely to be precisely 52%; the tax provisions are very complicated and will not be gone into here). This leaves


only £88,200 after-tax profits available for disposal. If the directors decide to recommend distributing half of this as dividend and to retain the other half for expanding the business, total dividend distribution will be £44,100. Divide this by the number of issued shares and the dividend will amount to `1,75p net per share', i.e. a dividend of 3.5% net of tax on the nominal value of 50p. A shareholder with 1,000 shares will receive a dividend of £17.50.

Companies normally pay dividends twice a year - an 'interim' dividend halfway through their financial year, based on estimates of what the final profits are likely to be, and a 'final' dividend after the end of the year. In the above example where the total dividend in the year was 1.75p per share, an interim payment will probably have been made of around 0.70p leaving a final amount payable of 1.05p.

Market Value And Growth

One might think from this that a shareholder could sell a share in a company such as that just mentioned for £2 on the market. Although this could be so it is not necessarily so. The price of any share in the market is determined by the actions of buyers and sellers on the Stock Exchange, and most people buy industrial shares not because of their underlying asset value, but for what the shares represent in terms of a flow of income by way of future dividends, and of capital growth (i.e. future rises in market price of the shares).

So the market price of a share reflects many factors:Market Value And Growth

Personal And Business Finance 2018

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