- Important terms to know about dividends generally
- The procedure for declaration and issuing of dividends
- Other matters such as unclaimed dividends, and trading of shares cum dividends
The term ‘dividend’ is not defined under the law governing companies in Tanzania, that is, Companies Act Companies Act, No. 12 of 2002. According to the generally accepted definition, “dividend” means the profit of a company, which is not retained in the business and is distributed among the shareholders in proportion to the amount paid-up on the shares held by them. Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. This is done after consideration of the profit and loss accounts.
Dividend for a financial year of the company (which is called ‘final dividend’) is payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of Directors. Sometimes dividends are also paid by the Board of Directors between two annual general meetings without declaring them at an annual general meeting (which is called ‘interim dividend’).
Important terms related to Dividend
The ex-dividend date is the day on which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. This is an important date for any company that has many stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be paid the dividend easier. It is just as important for investors, however, since you must own a stock before the ex-dividend date in order to receive the next scheduled dividend.
Prior to this date, the stock is said to be cum dividend (“with dividend”). This means that all existing holders of the stock and anyone who buys it will receive the dividend, whereas any holders selling the stock lose their right to the dividend. On and after this date the stock becomes ex dividend (“without dividend”) meaning that all existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock now will not receive the dividend.
Shareholders who properly registered their ownership on or before the record date (or “date of record”) will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.
The payment date (or “pay date”) is the day when the dividend checks will actually be mailed to the shareholders of a company or credited to brokerage accounts.
The declaration date is the day on which a company’s board of directors announces its next dividend payment. Also known as the “announcement date,” this is the least important date for dividend investors to consider.
Dividend under the Company’s Act, 2002
Payment of dividend in Tanzania is provided for under Section 180 of the Companies Act, 2002 (‘the Act’). Dividends are declared by the Board of Directors subject to approval at the general meeting of all shareholders. Section 180(3) of the Act provides that dividends be paid out of the company’s profits or realized revenue. The major consideration prior to declaration of dividend is the continued company’s ability to discharge its liabilities when they fall due.
Procedure for Declaration of Dividend
- Convene a Board meeting to deliberate on the annual accounts of the company and recommend on the amount of dividend to be paid.
- Prepare Director’s report with recommendation on declaration of dividend. This report is presented to the Annual General Meeting for deliberation and approval.
- Convene Annual General Meeting for passing a resolution for payment of dividend to the shareholders of the company.
Importance of Dividend
- It acts as an indicator of the performance of the company; hence would attract more investors/shareholders to invest in the same company.
- Can be used to increase the value of the company through increase in capital reserves (retained earnings).
- Can be used to pay company’s debts.
- Can be used to buy back the company’s shares.
Mode of payment of Dividends
- Cash deposit into a shareholder’s bank account.
- Cheque payment through the shareholder’s registered postal address.
Procedure for Unclaimed Dividend
Any dividend which remains unclaimed for twelve years from the date when it became due for payment becomes forfeited and ceases to remain owing to the company. This is in accordance with Regulation 110 of Table A to the Schedule of the Companies Act, 2002.
The period envisaged above may vary depending on special conditions entrenched in the Articles of Association of a particular company. Such Articles may provide for a shorter duration of forfeiture of unclaimed dividend by empowering the Board of Directors to pass a resolution to forfeit such unclaimed dividend.
Trading of Shares cum Dividend
Under Tanzanian law, the transferees of shares will be entitled to declare dividend if they do so before ex-dividend date. Any person who purchases shares after the ex-dividend date will be deprived a right to payment of dividend. This condition is not provided for under the Act. However, most companies usually provide for the ex-dividend date in their declaration for dividend. This date means that anyone who purchases shares thereafter will not be entitled to a right of dividend.
Declaration of dividend is one of the simplest ways for companies to communicate financial well-being and growth of the company. Companies which pay out dividend regularly to shareholders from earnings, send a clear, powerful message about future prospects and performance. A company’s willingness and ability to pay steady dividends over time – and its power to increase them – provide good indications about its performance and growth.
The Tanzanian Companies law does not compel companies to declare dividends. The Board of Directors may decide on how to use the profits of the company at the end of each financial year of the company. Such profits may be re-invested or declared as dividend to the shareholders. Most companies develop their own dividend policies.
Ordinarily, mature, profitable companies pay dividends. In so doing, they attract the public to invest in the company with prospects of obtaining profits from such investments. In Tanzania, the public has been so much attracted to purchase shares from companies such as Tanzania Breweries Limited, Tanzania Cigarette Company Limited and CRDB Bank Plc. These companies have often been declaring dividends; hence attracting the public to purchase shares listed in the stock exchange market.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.