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Dividends different to quoted yield?

Investment | Shares Helpful? 3

Asked by winger14, submitted 13 June 2012.

Open Quote I am completely confused about the yield on shares - I thought the yield quoted in the papers is what you receive, and there is no additional tax to pay provided this does take you into a higher rate tax band, but I recently noticed in the Mail on Sunday that they quote a net yield.

What is the yield you receive and is there basic rate tax to pay on this if you are a basic rate tax payer?

I hope you can clear this up for me
End Quote

Answered by Justin on 10 July 2012

I guess there are two issues here: how the quoted yield relates to the actual dividends you'll receive and how those dividends are taxed.

The yield quoted in newspapers and websites is invariably calculated as the last full year's dividend divided by the current share price. So if dividends over the year amount to 4p and the current share price is 100p then the quoted yield would be 4%. Should the share price fall to 80p the yield would increase to 5% (i.e. 4p/80p).

The flaw with this figure is that future dividends (i.e. what you'll actually receive) are uncertain, they may not be the same as last year's. To try and overcome this some publications/websites (e.g. also display forecast yields, i.e. expected dividends for the current year divided by current share price. This is arguably more useful...if the forecasts are right. In general terms the forecasts for big companies (e.g. FTSE 100) tend to fairly reliable, but the scope for error usually increases as company size reduces.

So quoted yields are useful as an indication of how much income you might receive based on the share price at a single point in time, but it's certainly not set in stone. Another option is to look up a company's dividend history, to get a feel for how much and how steady or not the payments have been.

Dividends paid by UK companies are always deemed to be paid net of basic rate tax. Because the money is paid out of company profits subject to corporation tax, HMRC takes the view it would be unfair to also tax basic rate taxpayers. This means dividends are technically net, but as it's not actually possible to enjoy gross dividends (even in ISAs & pensions - Gordon Brown put a stop to that) whether or not 'net' is displayed is arbitrary - the yield figure should be unaffected. Higher rate taxpayers have to pay a further 25% tax on the dividend received - although this can be avoided by holding the shares within an ISA or pension.

Hope this clears up the confusion.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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