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.

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 subject to shareholder approval.

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.

How Equalizing Dividends Work

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 a case, 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 Equalizing Dividend

Investors who receive equalizing dividends or payments are subject to certain taxable events. For the most part, though, it varies on a case by case basis. One way to avoid these costs is to hold the payments in a tax wrapper like an Individual Savings Account (ISA).

Investors holding funds outside of these tax wrappers should be aware of the different tax treatments of the dividend. Here, the income is treated in the same way as a normal distribution and should be reported on a United Kingdom tax return. Accordingly, investors deemed in receipt of reportable income can adjust their taxable income for a share of the equalizing dividend or payment.