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  2. How Do Dividends Work in Singapore?

How Do Dividends Work in Singapore?

During a financial year, the Board of Directors of a company decides to share interim dividends Singapore with shareholders from its profits. A company can pay dividends from its profits or reserves.

The amounts of dividends are according to the number of shares individual shareholders hold. It means the more shares investors own, the more dividends they receive. Singapore has a one-tier tax system, and the dividend amounts that shareholders receive from companies are not taxable.

If you’re here, you’re probably an entrepreneur figuring out how to grow their business better. Why not focus on your sales and strategy while you pass the routine paperwork tasks of accounting to experienced accountants in Singapore? Otherwise, read on to learn more about dividends in Singapore.

What Is a Dividend?

Proof of share ownership.

A share certificate is a verification that proves you own shares of a company, and that you are a certified shareholder of that company.

To the common question “What is a Dividend?” The answer is dividends are part of profits that a company shares with its shareholders according to the dividend declaration rules in Singapore. Companies pay interim dividends regularly, and investors earn them as one of the ways to get a return on their investment.

It is important to note that not all stocks pay dividends. If potential shareholders are interested in stocks for dividends, they need to choose dividend stocks.

No Tax on SG Dividends

Singapore has a one-tier tax system so income is only taxed once. The dividends are tax exempt to the shareholders.

Are dividends taxable in Singapore?

Generally, no tax is payable on the dividends mentioned below:

  • A resident company in Singapore share dividend, on or after January 1, 2008, under the one-tier corporate tax regulation except for co-operatives;
  • Resident individuals who receive foreign dividends in Singapore on or after January 1, 2004. If a resident individual in Singapore receives foreign dividends through a partnership, dividend tax Singapore may not be payable on those dividends if they meet certain conditions. For more details, you can refer to Tax Exemption for Foreign-Sourced Income;
  • Distribution of income by Real Estate Investment Trusts (REITs), except dividends received by individuals through a partnership in Singapore or from conducting a business, trade, or profession in REITs.

How Do Dividends Work in Singapore?

The value of a dividend is determined based on per share, and a company pays it equally to all shareholders in the same class, such as common, preferred, and other dividends. The Board of Directors must approve the payment.

When a company declares a dividend, it pays the amount on a specific date, which is called the “payable date.”

Here is how it works:

  • The company earns profits.
  • The Board of Directors decides to share some excess profits with shareholders instead of reinvesting the amount.
  • The Board approves the dividend distribution.
  • The company announces the dividend date, along with the value per share, the record date, and others.
  • The company pays dividends to shareholders as planned.

Types of Dividends

Usually, a company pays dividends on its common stock. There are several types of dividends a company can choose to pay out to its shareholders.

  • Cash dividend: This is the most common dividend that companies pay in cash directly into the brokerage account of shareholders.
  • Stock dividend: Companies often pay additional stocks to investors as dividends instead of paying cash.
  • Dividend reinvestment programs (DRIPs): Stockholders can reinvest their dividends through DRIPs back into the company's stock, sometimes at a discount.
  • Special dividend: Companies pay special dividends outside of their regular policy. They share these dividends from the excess cash-in-hand. Preferred dividend: A preferred stock functions more like a bond instead of a stock. Companies usually pay dividends on preferred stock quarterly. However, dividends on these stocks are generally fixed, unlike dividends on common stock.

Examples of Dividends

Here is an example of dividends based on the 2017 financial statements of General Electric (GE).  In the screenshot below, we can see that in 2017, GE announced a dividend of $0.84 per common stock in 2016 - $0.93 and 2015 - $0.92.

We can compare this figure to Earnings per Share (EPS) from continuing operations and Net Earnings during the same period.

Statements of Earnings Loss
Source: corporatefinanceinstitute.com

Impact

Dividend payments are irreversible. It means these payments go out of a company’s books and accounts permanently. Due to this, sharing dividends impact the price of shares, which might go up after the announcement by nearly the amount of the dividend payable. Subsequently, it may decline by a similar amount after the opening session before the record date.

For example, a company is trading at S$60 per share and announces a dividend of S$2 on the date of the announcement. Soon after the news became public, the price of shares went up by nearly S$2 and reached S$62. The stock trading happened at $63 one business day before the ex-dividend date. Now, the stock was adjusted by S$2 on the ex-dividend date and began trading at S$61 at the initial phase of the trading session because whosoever was buying on the ex-dividend date could not have received the dividend. Although such things may or may not happen in reality, the price should be adjusted by reducing the stock price by the dividend on the ex-dividend date.

When a company distributes a dividend, it does not have any impact on its Enterprise Value. However, it reduces the Equity Value of the company based on the paid-out value of the dividend.

Enterprise Value
Source: corporatefinanceinstitute.com

Important Dividend Dates

Dividends SG payments follow an order of events, and the relevant dates are important to figure out which shareholders are eligible to receive the dividend.

  • Date of Announcement: The management of a company announces a dividend date on the date of the announcement. The shareholders must approve it before they get paid.
  • Ex-dividend date: On this date,  the dividend eligibility expires, and that is why it is called the ex-dividend date. Anyone who buys shares after this date will not qualify to receive the dividend.
  • Record date: Typically, it is the cut-off date that a company sets up to determine the eligibility of shareholders to receive a dividend.
  • Payment date: The date on which a company pays the dividend, and the money is credited to shareholders’ accounts.

How Much Can I Distribute?

The IRAS dividend income distribution rules state that a company can share all the net profit after paying taxes and settling its losses. For example, after paying tax, the remaining profit of your business is S$40,000 in the current financial year. In the previous year, if you had losses of S$10,000, you have to offset this amount first. You can distribute the balance of S$30,000 as dividends.

How Much Does Each Shareholder Get?

Generally, the amount of dividend that shareholders receive depends on the number of shares they own. If your company wants to set up a different dividend ratio, you can mention that in the shareholder distribution agreement.

Can I Distribute If My Company Has Not Made a Profit?

You cannot. If your company announces and pays dividends when it has not made any profit, the directors who approved the distribution payment will be subject to a criminal offence. It may result in a fine of S$5,000 or imprisonment for a year.

What Do I Need to Do to Declare Dividends?

Usually, a company declares interim and final dividends. The Board of Directors makes the decisions on interim dividends based on the quarterly gains. Passing a directors’ resolution is enough.

On the other hand, shareholders approve final dividends at the end of the financial year. It requires a unanimous agreement via voting. Usually, it happens during the Annual General Meeting (AGM).

When announcing interim and final dividends, the Corporate Secretary needs to issue warrants to all eligible shareholders. All the details will be entered into your accounting books.

Soon after the agreement on the dividend distribution, it becomes the company’s debt to shareholders until the payment.

SG Secretary

Can I Pay Myself Dividends Instead of Salary and Save on Taxes?

Paying taxes as a director.

As a company director, you would have to pay taxes on the salary you earn.

If you are working as a director or an employee in a company, your salary should be sufficient for your role. A business owner who receives only dividends will not have enough source of income if his/her business is unable to generate profits.

So, the bottom line is you can pay dividends to shareholders as a bonus if your company makes enough profits.

Attention

If you are a foreign resident working in Singapore, the salary you receive and the taxes you pay will affect your legal status. The Ministry of Manpower will look into these details when deciding on your visa.

Do I Need To Declare Dividend Income?

You do not have to declare dividend income. You only need to make sure that your business provides the relevant information regarding IRAS dividend income and mentions the same on the dividend voucher.

Does Total Return Include Dividends?

Yes, the total return includes both dividends and appreciation.

How Can I Calculate the Dividends Payout Ratio From the Balance Sheet?

Here is how to calculate dividends payout ratios from the balance sheet:

  • Consider the total common equity figure of shareholders. You can get it from your company’s balance sheet.
  • Now, divide the amount by the current share price of the company.

When Are Singapore Dividends Taxed?

Singapore dividend tax happens in the year when dividends are declared payable.

Why Do Companies Pay Dividends?

A company needs to think about the interest of all its shareholders who have invested in the stocks. The company distributes dividends as a thank-you gesture for their support.

Are Dividends Recorded on the Balance Sheet?

After paying the dividends, a company does not need to record them on the balance sheet.

Do Dividends Go on the Balance Sheet?

Usually, the balance sheet contains the dividends that you declared but have not paid yet. You have to show them on the balance sheet as current liabilities.

Where Are Dividends Paid From?

A company pays dividends from its net profits.

Why Are Dividends Important?

When a company pays dividends, it indicates that it has a steady cash flow, can generate profits, and may provide consistent revenue to investors. Dividend distribution may also give insight into the intrinsic value of a company. Many countries have also rolled out preferential tax treatment to dividends where they are tax-free income. On the contrary, when investors sell shares at a profit they have capital gains, which could be up to 20%.

How To Evaluate?

Investors can apply various methods to evaluate a company's dividend and make an apple-to-apple comparison with similar companies.

Dividend Per Share (DPS)

Businesses that can increase their dividend distribution every year are in high demand. The calculation of dividend per share (DPS) shows the distribution of dividends by a company for each stock holding for a specific period. Keeping track of the DPS of a company allows investors to learn about the companies that can grow their dividends over time.

Dividend Yield

Usually, online broker platforms or financial websites report the dividend yield of a company. You can calculate it by dividing the annual dividend of the company, divided by the stock price on a specific date.

The dividend yield is calculated as a percentage, which is a financial ratio (dividend/price) that shows the number of dividend payouts of a company every year based on its stock price.

Dividend Payout Ratio

Experts say that one of the easiest ways to measure the safety of a dividend is to check its payout ratio or the portion of its net income that a company intends to distribute as dividends. If a company wants to pay out 100% or more of its net income, it could be a problem. In difficult times, income may become too low to cover dividends. Usually, investors seek payout ratios that are at 80% or below. Similar to the dividend yield of a stock, the payout ratio of a company gets listed on broker websites or financial portals.

Conclusion

We’ve got your back when figuring out all the things you need to grow a business as an entrepreneur. If you need to hand over routine paperwork that helps you stay as a compliant corporate citizen in Singapore, we’re here for you. Let our experienced corporate secretaries help you with your doubts.

Next steps

If you have some questions left, ask our experts for help. Or hire us to take care of your dividends and ensure that you do not break any laws. Talk to us via a secure chat to learn more.

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