Understanding what is dividend: In 2014, an investor was just going through his bank statement and saw that he had received 43,000 rupees from Infosys.
He was shocked, happy, and a little worried, so he call up his stockbroker immediately and enquired about the money that he received from Infosys.
The broker explained that they got dividends on shares he owned of Infosys. Whenever anyone buys a share of a company, they become part-owners of that company, even if they own one share of that company.
There are two ways to make money by owning shares –
– One is via capital appreciation – where the price of the stock increases with time and selling the stock for a profit. For example, if the stock price is 100 rupees in the first month, and after two months, the stock price increases to 150 rupees, we sell it and make a 50-rupee profit.
– The other way is through getting dividends – In this case, you just have to buy the stock and keep it, and dividend payments are made to the shareholders by the company. Dividends are profits earned by the company that it gives to the shareholders.
In 2014, Infosys announced a final dividend of 43 rupees per share. We might wonder why the company is giving its profit to us.
So basically, when a company earns profits, it has two choices.
– By investing inside the company, starting new projects, buying new assets, or expanding existing projects, the company’s internal value increases, and therefore the stock price. These are called “growth companies,” which provide capital appreciation.
– And sometimes, even after they invest in the company’s operations, there is still a lot of money left. They are self-sufficient. At those times, the company distributes the profit to the shareholders. Most companies that offer dividends are very large companies that have a very large market share with strong industry coverage.
How Do Dividends Work?
The dividend is set by the company’s board of directors. It is the company’s choice to pay the dividend to the shareholders.
They are paid at an interval. It can be quarterly, annually, or sometimes a special dividend is paid. It is all up to the company. Dividends are paid on a per-share basis.
A consistently increasing dividend payment by the company is viewed as an indicator of financial stability.
What Does “Dividend Yield” Mean?
The dividend yield is a ratio of the total dividend paid in a given year against the current stock price.
Dividend yield = Dividend per-share / Current stock price
Let us understand
|Company A||Company B|
|Total Profit||50 Crore||500 Crore|
|Share Price||200 rupees||2000 rupees|
|Shares Outstanding||1 Crore||20 Crore|
|Dividend Per Share Annually|
(Total profit / Shares outstanding)
|Rs. 50||Rs. 25|
We can see from the above example how they are distributed. If an investor held 10 shares of company A, the investor would have received 500 rupees (50×10), and if the investor held 5 shares of company B, they would have received 125 rupees.
What is Dividend: The Types Of Dividends
Let’s see what the different types of dividends exist –
● Cash Dividend: it is the most common form of dividend which is paid to the shareholder, and it is directly transferred to the bank account of the shareholder. The shareholder can do anything they want with this money.
● Stock Dividend: The company issues additional stock to the shareholders. The company might not have any cash. The stock dividend has an advantage where the shareholder does not have to pay taxes on the stock received. When the stock price rises in the future, the shareholder makes a profit.
● Property Dividend: Sometimes the company pays the shareholder, by distributing the property which is owned by the company, payment of property dividend is very rare, doing this has accounting advantages for the company.
● Liquidating Dividend: When the company is closing down its business, the assets are distributed among the shareholders in the form of dividends, but the one thing about liquidating dividends is that shareholders have the last claim on the company’s assets. All the other liabilities are paid first.
● Scrip Dividend: Here, the company issues a promissory note to pay the shareholders at a later date in the future. The company opts for this method when there are low cash reserves. Some companies pay this with interest.
Who Is Eligible to Get Dividends?
First, there is the declaration date. This is the day when the board of directors approves the payment of dividends.
The date on which shareholders must own the stock to receive the dividend is called the record date, and the date on which the dividend payment will be made is the payment date.
What is The Ex-Dividend Date?
If a new investor purchases the share on or after this date, they are not eligible to receive the dividends announced by the company. They should wait for the next dividend declaration date.
The ex-dividend date is usually one or two days before the record date.
Dividend payment chronology example
|Declaration Date||Ex-dividend date||Record date||Payment date|
|August 25||5 September 15||September 17||September 30|
If a new investor buys the shares on September 15 or any later day, they are not eligible to receive the dividends. If someone wants to receive dividends they need to purchase it before the ex-dividend date.
If they purchase on or after the ex-dividend date, the buyer will be eligible to own the stock. The dividend will still go to the seller or the previous owner of the stock.
On the ex-dividend date, the stock price falls by approximately the amount of dividend given per share, in the absence of any other factors affecting the stock price.
What is Dividend: Is Giving Dividend Good Or Bad?
There are a lot of disagreements regarding this topic. Paying dividends generates a passive income for the shareholder, but some people see it as a bad sign that the company is not using its profits to invest in itself.
Dividends can be a very good thing for an investor who is looking for a passive income and has a low-risk appetite, it is bad for investors seeking higher capital appreciation with a high-risk appetite.
Dividend Taxation in India: For an Indian resident, the taxation on dividends is as follows, if a person receives, more than Rs 5,000 as dividends from a company, the company deducts (TDS) 10% tax on the dividend received, and if the dividend amount is less than 5,000 there is no TDS.
To summarise what is dividend, they are as a whole are very important and certain valuation models use it to find the intrinsic value of a company. Dividend-paying stocks are good.
They should be in everyone’s portfolio since they provide diversification and passive income, but a combination where the stock has both capital appreciation and pays a significant amount of dividends is a stock that everyone should look for.
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