Late December is all about receiving for roughly 1.5 million Australian investors, and it's not just Christmas presents / File Source: Supplied

Billions of dollars in cash has just been paid to shareholders in three of the Big Four banks through their final dividends.

The major banks have paid a total of $14.4 billion in dividends to shareholders this year, while fellow blue-chips BHP Billiton and Rio Tinto have handed out $3.2 billion and $440 million respectively.

Telstra has given its shareholders $3.5 billion, Woolworths has paid $1.4 billion and Wesfarmers $1.3 billion.

Almost all of us get dividend income through our superannuation funds, but direct share ownership is the best way to get a slice of the dividend action.

Like savings account interest but better, dividends usually come with a tax benefit, known as a franking credit.

This "dividend imputation system" was introduced in 1987 to prevent the double taxation of profits in the hands of companies and then their shareholders, Bourke Shaw Financial Services principal Lawrence Orlando says.

"If a shareholder of a company receives a dividend, they must pay tax on the amount received as it is income.

"However, the shareholder is entitled to a tax credit, or franking credit, for the tax the company has already paid," he says.This benefits investors differently. Those on high marginal tax rates have to pay tax on the difference between their tax rate and the 30 per cent company tax rate.

People on the typical 30 per cent personal tax rate effectively get their dividends tax-free, while lower income earners such as retirees and super funds, which pay 15 per cent tax on earnings, get the biggest benefits.

"If the individual does not earn sufficient income to be taxed or the franking credits are larger than the tax debt, then a refund is due from the ATO," Orlando says.

Another benefit of dividends over bank interest is that dividends typically grow over time.

For example, a $10,000 cash investment paying 5 per cent a year in interest will always pay $500 and the principal stays the same.

But a $10,000 investment in a company that is growing its profits should deliver increased dividend payouts plus capital growth over time.

The big negative from dividends is volatility. Most companies cut back their dividends during the global financial crisis and some stopped them completely, placing a strain on many self-funded retirees.

HLB Mann Judd wealth management partner George Wright says dividend income continued during the GFC "albeit at a lower level".

"Ignoring investment risk, and from a pure income perspective, a 4 per cent fully franked dividend represents a higher level of total income than a 5 per cent interest payment, provided you can accept the delay between receiving the dividend and claiming back the franking credit," he says.

The share market is paying a dividend yield of about 4.7 per cent, not including tax benefits, while most online savings accounts are paying about 5.5 per cent interest.

Many companies offer reinvestment plans, where shareholders' dividends automatically buy more shares in the company without brokerage or other costs.

"If you don't receive the dividend in the first place, you can't spend it, so it constitutes a forced regular savings plan," Wright says.

However, buying more shares in the same company may not be the best way to diversify your assets, so look at other alternatives, he says.

"Be aware that each new parcel of shares has its own cost base for capital gains tax purposes. Participating in a DRP over a long period of time can accrue quite a lot of tax calculations when the parcel is eventually sold. Maintain your tax records to avoid a hefty accounting bill," he says.

"You still need to include the dividend in your tax return, and potentially pay tax, even though you did not receive the cash in the first place."

Prescott Securities financial adviser Benjamin Prisk says people should not always buy shares in companies that offer the biggest dividend payouts.

A high dividend yield may simply be because a company's share price is weak.

Several big dividend payers collapsed during the global financial crisis or wound back their payments dramatically.

"More attention should be given to the underlying company," Prisk says.

"The most attractive companies for any investor are those that demonstrate sound management, conservative debt levels, quality of business and recurring earnings.

"Stocks that offer both a solid regular income and capital gain are generally the keepers. In general, I would favour taking the dividend payout as cash."

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BHP BILLITON
Dividend yield-------------------------- 2.1%
2010 dividends per share----------95.1¢
2000 dividends paid per share---23¢
Rise--------------------------------------313%
Share price growth since 2000---433%

THE COMMONWEALTH BANK
Dividend yield--------------------------5.7%
2010 dividends per share ---------$2.90
2000 dividends per share ---------$1.30
Rise--------------------------------------123%
Share price growth since 2000---61%

WOOLWORTHS
Dividend yield--------------------------4.3%
2010 dividends per share ---------$1.15
2000 dividends per share ---------23¢
Rise--------------------------------------400%
Share price growth since 2000---225%

WESTPAC
Dividend yield--------------------------6.1%
2010 dividends per share ---------$1.39
2000 dividends per share ---------54¢
Rise --------------------------------------157%
Share price growth since 2000--- 72%

ORIGIN ENERGY
Dividend yield--------------------------2.95%
2010 dividends per share ---------50¢
2000 dividends per share ---------13¢
Rise --------------------------------------285%
Share price growth since 2000--- 818%

Source: Iress