Gdy

[scouseben]

I have a question regarding the calculation of the GDY which is one of the "ratios" used to analyse accounts.

I believe that dividends are paid net with a 10% tax credit and there is no further liability for basic rate tax payer. Does this mean that 20% tax is deducted from the gross dividend but the governemnt in effect "refund" 10% tax (ie the credit), terefore the Net Dividend Yield received by the share holder is 90% x GDY?

Secondly, in questions were it states that, say £100000 dividend is paid, is this stating what is paid out by the company, or what is paid to (recieved by) the share holder, and is there a difference?

Eg. So if 100000 shares, dividend per share (DPS) of £1 (or "grossed up" £1.11, share price of £20 then would GDY = DPS / share price = 1 / 20 = 5% or = 1.11 / 20 = 5.5% ?

It might be a bit of a stupid question but I think I am confusing myself somewhere along the line. It makes sense to me that the the share holders receive it net of tax ie NDY, but then why would they be concerned with GDY?

 

[Lynn Birchall]

Hi scouseben

I believe that dividends are paid net with a 10% tax credit and there is no further liability for basic rate tax payer.

yes

Does this mean that 20% tax is deducted from the gross dividend but the governemnt in effect "refund" 10% tax (ie the credit), terefore the Net Dividend Yield received by the share holder is 90% x GDY?

That would be logical, but unfortunately it's not how it works The dividend is paid out of the company's net of tax earnings. These earnings have been taxed at the company's corporation tax rate. It's this net dividend that's of interest really (and is the "starting point" as opposed to the "gross dividend" being the starting point). The "gross dividend" includes the 10% tax credit and is obtained by "net dividend/0.9". This is just a notional thing really (as 10% is not the rate of tax the company paying the dividend has paid, nor is it the rate of tax the recipient of the dividend pays).

Secondly, in questions were it states that, say £100000 dividend is paid, is this stating what is paid out by the company, or what is paid to (recieved by) the share holder, and is there a difference?

It's both (although some shareholders may then have to pay some more tax).

Eg. So if 100000 shares, dividend per share (DPS) of £1 (or "grossed up" £1.11, share price of £20 then would GDY = DPS / share price = 1 / 20 = 5% or = 1.11 / 20 = 5.5% ?

Gross dividend yield would be 1.11/20. You could choose to look at net dividend yield (1/20) too. Although the gross dividend yield is the one in Core Reading, there's an argument that net dividend yield is more useful as it reflects what the shareholder actually receives.

It might be a bit of a stupid question but I think I am confusing myself somewhere along the line. It makes sense to me that the the share holders receive it net of tax ie NDY, but then why would they be concerned with GDY?

Not a stupid question at all. GDY is more of theoretical use than practical use. You're right - it does make more sense to be concerned with NDY.

Best of luck for the exam
Lynn

 

[scouseben]

Many thanks, that pretty much makes sense now!