Dividend Payments: Profiting From Your Payouts

Welcome to The Financial Engineer Newsletter,

This week, we take on a topic at the core of financial markets: dividend payments.

To most, dividends are just periodic cash reward for shareholders but some see it as a signal of financial health, critical cog in many value focused investment strategies, and represent an complex ecosystem, from the companies issuing them to the individual investors receiving them.

First, a message from Today’s Sponsor

Distribution Process

The dividend distribution process involves multiple parties working in concert:

• Company Initiation: It all begins with a company's board of directors declaring a dividend. Leading companies like Apple declare dividends quarterly. These amounts are approved by reviewing financials to determine distributable profits. Following this is the official dividend announcement which sets key dates:

  • The declaration date

  • The ex-dividend date, the deadline to own shares for eligibility

  • The record date to officially determine ownership

  • The payment date for actual disbursement

• Depository Trust Company (DTC) Involvement:

  • On the payment date, the company transfers the total dividend amount to its paying agent, typically a large commercial bank.

  • Major players like BNY Mellon and Citibank interface with the DTC, which processes over $2.15 trillion in dividend payments annually

  • The DTC calculates dividend allocations to brokerage firms based on shareholder records and reports payment information for transparency.

• Brokerage Distribution: Brokerages, in turn, receive allocated funds from the DTC for all clients holding the relevant stock.

  • Firms like Charles Schwab, Fidelity and Robinhood handle millions of transactions, with Schwab alone managing over $7.9 trillion in client assets

  • These brokerage systems allocate dividends to individual client accounts, including managing the intricacies of dividend reinvestment plans (DRIPs), converting foreign currencies, and sending account statements.

    • Foreign currencies makes dividend payments tricky for investors around the world, will cover it in future newsletter.

• Shareholder Receipt: Finally, on payment day, individual investors see a cash deposit unless enrolled in a DRIP.

Payment Methods

While the process is usually seamless from the shareholder side, companies offer various payment options:

• Direct Deposit: The dominant method, reducing processing costs by up to 80% compared to checks.

• Checks: Less prevalent but still used, with processing costs averaging $1-$2 per check.

• Dividend Reinvestment Plans (DRIPs): Popular among long-term investors, with some brokers offering commission-free reinvestment.

• Wire Transfers: Used for large payments, with fees ranging from $15-$50 per transfer.

Technology and Software

Underpinning of this entire process is the suite of sophisticated software automating many steps:

• Corporate Finance Software: The initial declaration and total calculation of dividends by Apple's finance team and others typically rely on industry-standard tools. Programs like Oracle Hyperion or SAP to niche accounting software and provide modules to assess financial health and regulatory compliance.

• Shareholder Management Systems: Once Apple and others have declared amounts, investor relations and other teams use cap table software, such as Carta, Eqvista, and Captable.io, with pricing ranging from $149 to over $799 per month. They calculate amounts due for each individual shareholder based on ownership structures and shareholder rights.

• Banking Software: Banks interfacing with the DTC or facilitating wire transfers rely on high-speed banking software.    

• Brokerage Platforms: Receiving allocations from the DTC and then disbursing funds to their own millions of customer accounts by Schwab and other brokerages utilizes customized software, handling transaction requests, real-time account updates, security compliance, tax reporting, and many more complex events within seconds.

Banks and Brokerages

As we have seen above, many entities take part in dividend processes:

• Paying Agents/Commercial Banks: Leading firms like BNY Mellon, Citi, or specialized firms like American Stock Transfer manage the flow of funds and regulatory obligations efficiently by interfacing between companies and the DTC with speed, scalability, and robust payment processing solutions and expertise. They generate revenue through flat or per-transaction fees, often charging 0.01% to 0.05% of the total dividend amount.

• DTC: Processes billions annually with minimal fees, typically a few cents per transaction.

• Brokerages: Generate income through transaction fees, account management services, and float interest. For example, Charles Schwab earned $1.4 billion in net interest revenue in Q2 2023.

• Custodian Banks and Transfer Agents: Special scenarios such as managing registered stock holdings directly through share certificates by transfer agents or receiving payments and accounting for dividends on institutional investment portfolios of mutual or hedge funds held at custodian banks enhance reliability and offer more services and generate fees that can range from 0.005% to 0.02% of assets under custody.

Key Takeaways

The dividend payment ecosystem is a multi-billion dollar industry, with each participant carving out its niche. This highly-integrated system's evolved from manually-processed paper checks to instant digital disbursements thanks to help of many fintech startups. As many large technology companies experience slow growth, they will turn “ON” dividend tap. In a optimistic scenarios, particularly if tech companies significantly increase their dividend payouts, we could see total dividend flows increase by 200-300% over the next 20 years.

Note: Above analysis is for informational purposes only and does not constitute financial or investment advice. If you observe any errors in numbers, figures, or other information presented here, please email me at [email protected].