DEFINITION of Equalizing Dividend
Equalizing dividends are one-time payments made to eligible shareholders when a company changes the dividend schedule. It's meant to compensate investors for any lost income from the missing dividend payments. Adjustments to the dividend schedule are usually made by executives at the company or the board of directors.
For example, they may move the payment back one month to accommodate any extenuating circumstances. In that case, the firm may compensate shareholders with an equalizing dividend payment for four months, instead of the normal three-month intervals, before the first payment under the new schedule.
BREAKING DOWN Equalizing Dividend
Equalizing dividends are paid to shareholders to compensate them for any dividend income lost from the change. By and large, equalizing dividends take place in the United Kingdom and parts of Europe rather than the United States. They are certain agreements funds make to ensure that the level of income attributable to each share is not affected during a distribution or accumulation period.
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). 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.