Why frequency of distribution is important

[Alaric]

Also, banks have to quote the true Annual Equivalent Rate in addition to any headline rate used to promote the account. If there is a difference it will probably be due (apart from bonuses which some pay) to the compounding frequency offered.

There's a marginal difference between paying 0.1% at the end of each month every month and paying 1.2% at the end of a year. The differences are a bit larger when it's 1% a month or 12% a year. Hence the statutory requirement to quote Annual Equivalent Rate which dates back to the era when double digit interest rates were commonplace.

I would assume deposit paying institutions take the payment frequency into account when deciding what they can afford to offer to be both profitable and competitive. Similarly with dividend distributions. If the money isn't distributed it remains in the Company contributing to profits. If it's in a fund it adds to the net asset value in the period before distribution.

[Lootman]

That's 3 pints in 'spoons.

And extra tax reporting each year,

I prefer 1 payment a year and a good sum I can do something with.

Or none.

There is no tax effect in Acc units and you only do one tax return a year so I don't see your point.

Each dividend has to be reported so it is more work for more payouts. Plus reconciliation efforts.

If the best argument you have to buy your fund is frequency of dividend then it is in more trouble than I thought.

[SDN123]

I’m genuinely curious, does it cost a company a lot to (say) pay a dividend quarterly as opposed to bi-annually?

I assume there must be some cost to each announcement and actually getting the money out there. If so there must be a tipping point along the lines of “I can distribute one pound twelve times a year or, with the money saved by less payments, £12.50 once a year”. That may or may not drown out the compound interest effect.

Does anyone actually know if this is a real issue? If not why do most companies only distribute twice a year?

SDN

[dealtn]

I’m genuinely curious, does it cost a company a lot to (say) pay a dividend quarterly as opposed to bi-annually?

I assume there must be some cost to each announcement and actually getting the money out there. If so there must be a tipping point along the lines of “I can distribute one pound twelve times a year or, with the money saved by less payments, £12.50 once a year”. That may or may not drown out the compound interest effect.

Does anyone actually know if this is a real issue? If not why do most companies only distribute twice a year?

SDN

I doubt the costs are overly large in a payment sense, but there would likely be additional costs. There would be pressure to release company accounts, and updates in line with payment frequency. What's the cost to an investor (particularly one, like most, that have a portfolio of companies) of only receiving a dividend twice yearly, and not more frequently?

[gpadsa]

Those that don't understand compounding returns are doomed to pay it.
Those that do earn it.

A practical example, I tried but was unable to replicate how the UK retail arm of "the vampire squid" get their monthly interest calculation numbers for the "Online Savings Account 2.25% AER/ 2.22% gross (variable)", so I couldn't tell if I was paying or earning by my ignorance. Other similar providers paid the interest that matched what I calculated myself. Neither here nor there, but a niggling annoyance

gpadsa

[vand]

The reason that I'm not a zillionaire is because my employer pays me at the end of each month rather than by the day...

[MDW1954]

You might be better reading ‘The Story of a Number’ by Eli Moar The number is e. It is a constant which equals approximately 2.71828. Those who have done a maths degree will recognise this but I must say I have forgotten most of it and am not inclined to swot up on it now. Incidentally, the Swiss Bernoulli family were amazingly erudite in mathematics in the 17th and 18th centuries, almost to my mind as good as Euler. Some of them at least are I think buried at Basel.

Dod

Dod is spot-on: e is highly relevant here.

See this excellent (and amusing) YouTube video, by one of my favourite "maths explainers".

https://www.youtube.com/watch?v=pg827uDPFqA&t=335s&ab_channel=EddieWoo

MDW1954

[Dod101]

You might be better reading ‘The Story of a Number’ by Eli Moar The number is e. It is a constant which equals approximately 2.71828. Those who have done a maths degree will recognise this but I must say I have forgotten most of it and am not inclined to swot up on it now. Incidentally, the Swiss Bernoulli family were amazingly erudite in mathematics in the 17th and 18th centuries, almost to my mind as good as Euler. Some of them at least are I think buried at Basel.

Dod

Dod is spot-on: e is highly relevant here.

See this excellent (and amusing) YouTube video, by one of my favourite "maths explainers".

https://www.youtube.com/watch?v=pg827uDPFqA&t=335s&ab_channel=EddieWoo

MDW1954

Yes I quite like Eddie Woo.

Dod

[Dod101]

I’m genuinely curious, does it cost a company a lot to (say) pay a dividend quarterly as opposed to bi-annually?

I assume there must be some cost to each announcement and actually getting the money out there. If so there must be a tipping point along the lines of “I can distribute one pound twelve times a year or, with the money saved by less payments, £12.50 once a year”. That may or may not drown out the compound interest effect.

Does anyone actually know if this is a real issue? If not why do most companies only distribute twice a year?

SDN

I suspect that most companies make dividend distributions only twice a year because they need to consider how much to distribute (unless they are an IT when that is pretty well laid down) They need to consider how much cash they have, the competing demands for it (ongoing expenses, any planned expansion, the economic outlook and so on) Obviously it must also cost them quite a bit to make an actual distribution, although of course much of that is automated.

Dod