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.

RELATED TERMS
  1. Capital Dividend

    A capital dividend is a type of payment a firm makes to its investors ...
  2. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  3. Dividend Policy

    Dividend policy structures the dividend payout a company distributes ...
  4. Final Dividend

    The final dividend is declared at a company's Annual General ...
  5. Portfolio Income

    Portfolio income is income from investments, dividends, interest ...
  6. Unpaid Dividend

    An unpaid dividend is a dividend that is owed to stockholders ...
Related Articles
  1. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  2. Financial Advisor

    How mutual funds pay dividends: An overview

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  3. Investing

    Why Dividends Matter To Investors

    There is much evidence as to why dividends matter for investors, profitability in the form of a dividend check can help investors sleep easily. Learn more.
  4. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  5. Investing

    3 Dividend Trends in the S&P 500 Index (TSN, LUV)

    Analyzing recent financial performance of companies demonstrating an inclination to issue consistent dividends to shareholders on a quarterly basis.
  6. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  7. Investing

    The Best Dividend Paying Stocks in Energy

    Investors need to look beyond dividend yield to find stocks that will help generate a stable dividend income.
  8. Investing

    WMT: Wal-Mart Dividend Analysis

    Wal-Mart raised its dividend for the 43rd consecutive year, despite losing over 25% of its market value in 2015, and its dividend remains healthy in 2016.
RELATED FAQS
  1. How and when are stock dividends paid out?

    A dividend is determined quarterly after a company finalizes its income statement. Dividends are paid either by check or ... Read Answer >>
  2. Can dividends be paid out monthly?

    Find out how stocks can pay dividends monthly and learn about the types of industries or companies that will most likely ... Read Answer >>
  3. Cash Dividends or Stock Dividends: Which is better?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two types of dividends: cash ... Read Answer >>
Trading Center