Equalizing Dividend

What Is an Equalizing Dividend?

Equalizing dividends are one-time payments made to eligible shareholders when a company changes its dividend schedule. They are meant to compensate investors for any lost income from the missed dividend payments that would have been received using the previous payment schedule.

Key Takeaways

  • Equalizing dividends are one-time payments to qualified shareholders to compensate for lost dividend income if the dividend schedule of a company is altered.
  • Dividend schedules may be changed by a company if they are unable to preserve the existing schedule due to unforeseen circumstances.
  • The practice of equalizing dividends is most common in the U.K. and Eurozone more so than in the U.S.
  • Equalization is treated as a return of part of the capital invested and is not normally taxable.

How Equalizing Dividends Work

Equalizing dividends are certain agreements for funds made to ensure that the level of income attributable to each share is not affected during a distribution or accumulation period. 

Adjustments to the dividend schedule are usually made by executives at the company or the board of directors. Firms may want to move the payment of dividends back or forward by a few weeks or months to accommodate extenuating circumstances that could arise, such as a shortage of cash on hand due to unforeseen events. In such cases, the firm may compensate shareholders with an equalizing dividend payment to offset the effect of the new schedule.

Equalizing dividends are paid to shareholders to adjust for any dividend income thus lost from the change. By and large, equalizing dividends take place mainly in the United Kingdom and parts of Europe rather than in the United States.

For background, funds pay out income on or after the ex-dividend date, at which point income is removed from the fund's net asset value (NAV) and paid to shareholders on a per-share basis. Investors who buy shares in the fund after the last ex-dividend date usually have not held the stock for a full income-generating period.

This means newly purchased shares will be grouped separately from those acquired earlier. They are still entitled to the same payment per share as any other owner of the fund, but part of the payment is treated as a return of capital, otherwise known as an equalizing dividend or payment. It makes the per-share amount paid to both groups whole. When that occurs both groups will be treated equally for future dividend payments.

Tax Implications of an Equalizing Dividend

Dividend payments are generally treated as taxable income, unless the investor holds the investment in a tax wrapper, such as an Individual Savings Account (ISA) in the U.K.

The investor is only liable to pay tax on the part of the payment that reflects their period of ownership, though. In the U.K., the income generated before the investment is made and which is included in the price paid for each unit is treated as a return of some of your initial investment and not taxable. Accordingly, investors deemed in receipt of reportable income can adjust their taxable income for a share of the equalizing dividend or payment.

Article Sources
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  1. Internal Revenue Service. "Topic No. 404 Dividends." Accessed Sept. 1, 2021.

  2. GOV.UK. "Tax on Dividends." Accessed Sept. 1, 2021.

  3. BMO Global Asset Management. "Understanding Equalisation Payments." Accessed Sept. 1, 2021.

  4. BlackRock. "Income Equalisation." Accessed Sept. 1, 2021.

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