In the financial world, the term ‘dividend’ refers to the distribution of a portion of a company’s profits to its shareholders. Investors seeking long-term capital appreciation through equity investments also consider dividends as an important source of income, which at times further supplements their investment rationale.

Dividend payments are normally distributed to shareholders once or twice a year through different forms and structures. Nonetheless, the traditional cash dividend and the script dividend (issuance of new stocks to existing shareholders) remain undoubtedly the most common type of dividend distribution to local shareholders.

Dividend payments are a common occurrence among most equities. But a company is not obliged to distribute any dividend payments to its common shareholders. Indeed, the propensity to distribute a company’s profits will depend, among others, on the presently held liquid cash levels the company holds at present and the envi­saged capital requirements it might need to finance any planned capital expenditures or investments.

Historically, in the local scenario, most listed equities on the Malta Stock Exchange have offered an attractive dividend yield. Moreover, locally listed companies tend to give particular importance to dividend distribution as most of these companies (with the exception of six equities) have paid dividends during the 2016 financial year. This represents approximately 74 per cent of locally listed companies.  More recently, as a result of the current low interest scenario and the subsequent strong upward momentum in the bond market, local investors, specifically those in search of more compelling yields, seem to have started shifting their preference to the equity asset class, particularly towards those companies that were offering attractive dividend yielding propositions.

A company is not obliged to distribute any dividend payments to its common shareholders

This demand brought about a subsequent rally among most of the equity prices, consequently relatively abating previous dividend yields. That said, as clearly shown in the accompanying illustration, present dividend yields on the local equity market still remain comparably attractive for those investors seeking such returns.

Another important indicator that an investor ought to look at, is the company’s level and consistency of its dividend percentage pay-out, which essentially represents how much of a company’s net profits are paid out as dividends.

Five-year average percentage pay-out.Five-year average percentage pay-out.

Most of the locally listed companies have historically maintained an appealing pay-out ratio, with most of the companies that pay out dividends distributing over 40 per cent of their profits. Only  three companies have on average paid less than 40 per cent of earnings.

Those investors who hold particular interest in these local dividend stocks have certainly welcomed a measure presented in the last government Budget in October 2016, which granted tax incentives to shareholders who received dividend payments from locally listed companies. This new measure relates to shareholders receiving dividend distributions on or after January 1, 2017, by companies listed on the Malta Stock Exchange.

Such shareholders must not own over 0.5 per cent of the nomi­nal share capital and dividend rights. These shareholders will be entitled to claim a tax credit or refund of the underlying tax paid by the company distributing dividends on the earned profits. The tax credit will be based on the income tax rates applicable to the respective shareholder. This initiative will undoubtedly drive more interest, particularly among inves­tors seeking to enhance their returns from dividend yielding local equities.

Nowadays, investors tend to tap the local equity market either by investing directly into equities they deem attractive and present the most alluring propositions in terms of growth and dividend income, or alternatively invest through an actively managed fund. While the former can be appealing to  inves­tors who are actively involved and closely review the local market, a managed fund could provide the necessary expertise and diversification to investors who require a more systematic approach.

Clayton Scicluna is an investment mana­ger at BOV Asset Management Ltd.

The writer and the company have obtained the information contained in this article from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article. They have no obligation to update, modify or amend the article or to otherwise notify readers thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein, changes or subsequently becomes inaccurate. Furthermore, past performance is not necessarily indicative of future results.

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