Understanding dividend income and dividend tax

Dividends are the share of a company’s profits distributed to its shareholders. However, the tax implications surrounding dividends in Ireland can be quite complex. In this guide, we’ll take you through what dividends are, the various types you might encounter, how and when they’re paid, and the taxes Irish residents need to be aware of.

Dividends are a way for companies to share their profits with shareholders. When a company makes a profit, it may choose to distribute a portion of that profit to its investors. Shareholders then receive these payments based on the number of shares they own. Dividends can come in the form of cash or additional shares.

Dividends are usually paid out on a regular schedule – most often annually, but some companies may pay out semi-annually or quarterly. Not all companies choose to pay dividends. Some may plough profits back into the business instead.

In Ireland, dividends from shares are considered taxable income, so you’ll need to declare them to Revenue when filing your taxes.

• Cash dividends. The most common type of dividend. Shareholders receive a cash payment directly from the company’s profits on a regular basis.

• Stock/scrip dividends. Instead of cash, the company gives additional shares to its shareholders. They might choose this if they want to reinvest profits back into the business while still rewarding shareholders. Scrip dividends offer the advantage that tax is usually not due until the shares are sold.

• Property. A company may distribute physical assets or property to its shareholders. The value of the property is taxed similarly to cash dividends. This is a less common option in Ireland. 

• Liquidating/special dividends. These are one-time payments, often issued when a company has surplus cash or is going through liquidation. They are usually larger than regular dividends and are distributed when the company doesn’t expect to need the funds for future growth.

If you own shares in a company that declares a dividend of €2 per share, you would receive €2 for each share you hold. These payments are typically deposited directly into your bank account.

Companies use a specific calculation, called the dividend payout ratio, to determine how much they will pay out to shareholders. For instance, if a company earns €300 million in a year and pays out €100 million in dividends, the payout ratio is 33% (100 ÷ 300). That means the company distributes 33% of its earnings to its shareholders through dividends.

Companies pay dividends when they’re performing well and want to share their profits with shareholders. It’s a way to thank investors for their support by providing them with a return on their investment, which, in turn, encourages them to hold onto their shares.

Typically, businesses issue dividends when they have made a profit but don’t have any immediate need to reinvest the cash. This is why larger, well-established companies are often the ones that pay dividends.

Ultimately, paying out dividends from shares is a sign that management is confident about the company’s future earnings – after all, they need to be making a good profit. This creates a virtuous cycle that potentially drives the stock price higher. It’s a win-win situation; companies can both reward investors and boost their stock demand.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

It’s not just a case of investing in shares and waiting for the payout; there are several key dates to be aware of.

1. Declaration date: This is when the board of directors formally announces the dividend. They specify how much the dividend will be and also declare the record date and payment date.

2. Ex-dividend date: This is the first day a stock is traded without the right to receive the declared dividend. If you purchase shares on or after this date, you won’t receive the upcoming dividend payment. The ex-dividend date is set by the stock exchange and typically occurs two business days before the record date, allowing time for the transfer of shares.

3. Record date: The record date is the specific date a company uses to identify which shareholders are eligible to receive a dividend. Shareholders who own the stock on or before this date will receive the dividend payment. It is basically the cut-off point for determining eligibility.

Another important date to note is the payment date, when the dividend is actually distributed to shareholders. Dividends from shares are typically paid in one of two ways: cash or additional shares.

1. Cash dividends: The money will either be credited to your brokerage account or sent as a cheque. You can also opt to have the funds directly deposited into your bank account.

2. Stock dividends: You’ll get additional shares instead of cash. For instance, if a company offers a 5% stock dividend, you’ll receive 0.05 extra shares for each share you own. These extra shares will then be added to your portfolio.

The amount of dividends a company pays is primarily determined by its board of directors, who consider the company’s latest earnings and how keen they are to attract investors.

There are several key factors that play a role:

• If cash flow is tight, it may limit dividend payouts.

• Companies often need to pay off debts before rewarding shareholders with dividends, especially if debt contracts impose restrictions.

• If a company is in a growth phase, it may prefer to reinvest its profits rather than distribute them as dividends.

• It’s not only about profits, but also how stable those profits are. Consistent profits generally call for a steady dividend.

• Investors generally like to see regular, reliable dividends, so companies aim to balance payouts with reinvestment for growth to meet shareholder expectations.

• Companies also consider their dividend yield when setting payout amounts, as a higher yield can attract income-focused investors. If a company pays an annual dividend of €2 per share and its stock price is €40, the dividend yield is 5% (€2 ÷ €40). Maintaining a competitive yield can help keep investors’ interest.

In Ireland, the frequency of dividend payments varies by company, but monthly payments are uncommon. You’ll typically find dividends in two forms: interim dividends, which are distributed during the financial year based on the half-year performance, and final dividends, which are declared after the annual financial results are published.

The frequency of dividend payments can change based on market conditions. For instance, the Bank of Ireland halted its interim dividends during the 2008 financial crisis, but recently resumed them following strong profits in the first half of 2024*.

Of course, some investors prefer monthly dividends for better cash flow management. However, these options are limited within the Irish market. They might do better exploring US-listed companies that offer quarterly payments. Consider the example of investing in three different quarterly-paying stocks: Stock 1 pays dividends in January, April, July, and October; Stock 2 pays in February, May, August, and November; and Stock 3 pays in March, June, September, and December. By staggering investments this way, investors could effectively benefit from a monthly stream of income.

If you receive dividends in Ireland, you can expect to pay 25% in withholding tax, and then your overall tax rate on the income will depend on your tax bracket. Any dividend income you receive must be reported on your tax return.

Here are the individual elements of tax on dividends in Ireland:

• Income tax rates: Dividends are taxed at either 20% or 40%, depending on your marginal income tax bracket, similar to how your salary is taxed.

• Dividend Withholding Tax (DWT): If you are a resident of Ireland and receive dividends from Irish companies, a tax of 25% is withheld at source before the money reaches you. This means that the company pays this portion directly to Revenue on your behalf. What you receive is the net dividend after this deduction. Non-residents may be able to benefit from lower DWT rates.

• Tax on US dividends: In Ireland, you’ll also need to pay tax if you earn dividends from US companies. As with the Irish withholding tax, the US also takes a portion of those dividends before they reach you. Thanks to the double taxation agreement between Ireland and the US, Irish residents only have to pay 15%.

For more detailed information on dividend income and taxes, you can refer to the Revenue website.

We’ve put together an example showing how the tax might be calculated:

An Irish company pays a gross dividend of €4,000 after earning a profit of €40,000. The 25% DWT means the shareholder receives €3,000.

The shareholder has a marginal tax rate of 52% (40% income tax + 4% PRSI + 8% USC):

Total tax due: €4,000 × 52% = €2,080

But because €1,000 has already been paid as DWT, the investor will receive a credit for this amount. Their net tax liability will be €1,080 (€2,080 - €1,000).

Yes. When a stock goes ex-dividend – meaning it’s trading without the value of the next dividend payment – its price usually drops by the dividend amount. This reflects the fact that new shareholders won’t receive the upcoming dividend.

Also, when dividends are paid out in stock rather than cash, it can dilute earnings. This means there are more shares in circulation without a corresponding increase in the company’s earnings, which can lead to a short-term decline in share prices.

While investing in dividend-paying stocks can be appealing, it often comes with risks and tax implications. If you prefer a safer route, you might consider tax-free state savings or savings bonds, which are fixed-term savings accounts offered by the state.

High-yield savings accounts also offer a low-risk option with guaranteed returns. Plus, with Raisin Bank, your money is protected under the Deposit Guarantee Scheme should anything happen to the bank. 

To explore your options, register for a Raisin Account. Find the best savings account to meet your financial goals and watch your money grow!

*https://www.breakingnews.ie/business/bank-of-ireland-sees-half-year-profit-up-5-1656257.html

Dividend income is the money you receive from a company’s profits – while you hold the shares. When a company makes a profit, it may decide to share some of that with its shareholders as dividends. This payout is typically distributed quarterly, semi-annually, or annually.

Capital gains, on the other hand, are the profits you make when you sell your shares of stock. So, if you buy shares for €50 and sell them later for €70, that €20 difference is your capital gain.

As with other forms of investing, dividend stocks are never risk-free. Companies can cut or eliminate dividends at any point if their profits drop, impacting your expected income and stock value. In Ireland, taxes can eat into your funds. Plus, even solid dividend stocks can fluctuate in price, leading to potential losses. What’s more, focusing too much on dividends might limit your growth compared to other investments, like bonds, which can offer steady interest with lower risk.