Dividends can be described as periodic payments or distributions of profits or reserves made by companies to their shareholders as a reward for their investment. When a company has made enough revenue to cover its basic operating costs and projects, it can choose to divide up excess funds among its shareholders or reinvest in its share capital.
It is common for companies to pay dividends so as to attract more investors and improve the financial health of the company. For this payment to happen, it must be approved by the company’s board of directors, who also determine the amounts and time of distribution as provided for in the Company Act and a well-crafted dividend policy that provides transparency and guidance to shareholders regarding dividend expectations.
A dividend policy outlines the criteria and procedures for determining dividend payments, including factors such as profitability, cash flow, capital requirements, and growth prospects.
Types of dividends
There are several types of dividends, such as:
- Cash dividends - these are paid out by transferring money to shareholders through cash, cheque or electronically (EFT and Mpesa). Kenya Power Lighting Company and Safaricom, both is listed on the Nairobi Securities Exchange pay cash dividends.
- Stock dividends - these are additional shares issued to a shareholder in place of cash. Stock dividends increase a shareholder's potential returns without them having to invest more money. Additionally, stock dividends are not taxed until the shareholder sells their shares and companies do not part with their profits as they do with cash dividends. However, it may dilute the share price and the market value of the new shares could be lower or higher than when the original investment was made.
- Scrip dividends - these are promissory notes issued when a company does not have sufficient funds to pay dividends, giving investors additional shares instead of a cash dividend. Scrip dividends are normally new shares rather than pre-existing ones like the stock dividends.
- Property dividends - members receive assets including real estate, inventory or non-tangible assets like patents and copyright rather than cash as their reward. These are issued where a company does not have sufficient cash for distribution or does not wish to dilute its current share position by distributing shares. An example of this would be Real Estate Investment Trusts (REITS).
- Liquidating dividends - these are issued by a company when it is in the process of liquidating its assets and winding up its operations and therefore, cannot pay in the form of other dividends. Liquidating dividends are paid from the company’s remaining assets after all debts and liabilities have been settled unlike the other types of dividends.
Procedure for Distributing Dividends
Dividends are typically declared by the company's board of directors based on the company's financial performance and available profits. The board may decide to declare dividends at regular intervals, such as quarterly or annually, or at special meetings convened for that purpose. This declaration requires approval by the shareholders.
Once dividends are declared by the board of directors, they are paid to shareholders on specified dividend payment dates. The dividend payment dates typically include the declaration date (when the dividend is announced), the record date/ex-dividend date (the date by which shareholders must be recorded as owners of the shares to receive the dividend), and the payment date (when the dividend is distributed to shareholders). Shareholders who purchase shares after the record date are not entitled to the dividend for that period.
The payment of dividends is made through bank transfer or dividend warrant which is basically a document showing that a member is entitled to a certain amount. Dividends paid to shareholders in Kenya are subject to withholding tax at the applicable rate prescribed by the Kenya Revenue Authority and the rate may vary depending on factors such as the residency status of the shareholder and the type of dividend. For example, dividends paid to a Kenyan resident are taxable in Kenya at the rate of 5% unless the recipient is a Kenya resident company holding 12.5% or more of voting power of the company paying the dividend, then the rate would be 0%. The Withholding Tax paid is a final tax. Dividends paid to non-residents and any overseas holding company attract 15% WHT.
How we can help
At CM - SME Club, we help companies ensure transparency and accountability to shareholders and other stakeholders. This is through compliance such as disclosing information related to dividends in their financial statements and annual reports, including details of dividend payments, dividend policies, and any changes in dividend practices. For legal advice on shares and shareholding to protect the interests of your company, kindly contact law@cmsmeclub.com for assistance.
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