Whenever you invest in any stock, you can get profit in two ways, first increase in the value of your stock and second Dividend. If you are also aware of the stock market, then you must have heard the name of Dividend.
If you have also invested in any stock and you get dividend from that stock, then you must be happy to get dividend income.
Now if you are curious to know about dividends, then through this article we will tell you today what Dividend is, why dividend is given, what is Dividend record date and how to get Dividend?
What is Dividend?
If we talk about the meaning of dividend, then it means share of profit.
Dividend is what a company distributes out of its net profit to its shareholders. The company also gives some part of the company’s profit to its shareholders as a reward for investing in the company and giving them confidence.
Net profit remains after deducting operating expenses, interest and taxes from the profit earned by any company. In this way the company can distribute Dividend to its shareholders out of the profit which is left after deducting all their expenses.
How are Dividends given?
Dividend is given to the shareholders on the basis of the shares held by them. The amount of Dividend is declared per share, whoever has the number of shares will get the dividend.
Suppose SBI Bank announced a dividend of Rs 1 per share. If you have a total of 1,000 shares in SBI Bank, then you will get a total dividend of Rs 1 × 1,000 = Rs 1,000.
Why Company Pay Dividend?
If a company makes a net profit in a financial year (F/Y), then the company can distribute dividend to its shareholders. And if the company has to pay dividend, then the company announces it in its AGM.
If the company’s business is established properly and they do not need additional money for further business expansion, then the management can distribute dividend out of the profit to the shareholders.
To give or not to give Dividend is entirely a decision of the management. If they want, even after making profit, they can use that money for some other purpose by not paying dividend.
Can loss making company pay dividend?
In most cases, only the companies that are in profit pay the dividend. If a company has incurred losses in a financial year, although they have substantial cash reserves lying with them, then the company can pay dividend from its cash reserves.
Calculation of Dividend
Every company listed on the stock market has a Fair value. On the basis of this Fair value, the dividend is declared by the company.
It is worth noting here that the calculation of Dividend has no relation with the Current Market Price (CMP) of the stock.
Let us understand it with the help of an example.
Suppose you have some shares of Coal India. The market price of Coal India is running at Rs 150 and its Fair value is Rs 10.
If the company has declared 100% dividend, it means a dividend of Rs 10 per share. Here, if the company had declared 50% dividend, there would have been a dividend of Rs 5 per share.
At present, as per the order of SEBI, it will be mandatory for all companies to declare dividend in rupees per share.
How Dividend works
Dividend process (Summary) –
- The company earns a net profit or maintains a healthy cash reserve.
- The management decides that instead of reinvesting some of the profit, it should be distributed among the shareholders.
- Dividend is approved by the Board of Directors.
- The company declares the dividend, in which the dividend per share, when the dividend will be paid and the record date declares.
- In the end, the dividend is paid out to the shareholders.
Types of Dividend
The company can reward its shareholders by giving dividend in many ways –
- Cash Dividend
- Stock Dividend
- Property Dividend
- Scrip Dividend
- Liquidating Dividend
But out of all these methods, cash dividend is the most popular and most of the companies distribute dividend only through cash dividend. A company can distribute cash dividend in two ways –
1. Interim Dividend
If a company declares dividend during a financial year before the release of its final financial statements, then it is called Interim Dividend.
Interim Dividend is given out of the company’s retained profit or cash reserve.
2. Final Dividend
Final Dividend is the dividend declared by a company after the release of the final financial statements of the financial year.
In this, the company has to compulsorily put some part of its profit in surplus.
Important Dates of Dividend
Dividend Declaration Date- This date is the day on which the board of directors of the company declares dividend to the shareholders. This declaration announces the date of the dividend distribution, the amount of the dividend and the record date.
Record Date- The record date is also informed on the dividend declaration date itself. Every company has a record book of its shareholders, in which the names of all the shareholders are recorded.
It keeps changing daily. That’s why record dates are fixed. The shareholders whose name will be recorded in the record book on the day of record date will be entitled to get dividend.
Ex-Dividend Date- Ex-Dividend Date is generally 2 days before the record date. If you want to get dividend of a company, then you have to buy the shares of that company before the Ex-Dividend date.
If you buy shares on or after the ex-dividend date, you will not get any dividend. In such a situation, the person who sold the shares to you, will get the dividend.
Ex-Dividend Date is decided by the stock exchange. The stock exchange does this so that the names of all the correct shareholders are recorded on the record date.
Payment Date- The payment date is the date on which the dividend is paid to the shareholders.
Let us understand all these dates with the help of an example.
Suppose SBI announced dividend on 1st April 2021 and they fixed the record date as 28th April 2021.
Here the Ex-Dividend Date will be 2 days before the record date i.e. 26 April 2021.
The dividend payment date has been kept as 15 May-2021.
- Dividend declaration date- 1 April 2021
- Ex-Dividend Date- 26 April 2021
- Record Date- 28 April 2021
- Payment Date- 15 May 2021
If Vijay has 100 shares of SBI and he sold all his shares to Rajesh on 26th April 2021.
In such a case, Vijay’s name will be recorded in the share holder’s book on the ex-dividend date. Because of this, only Vijay will get the dividend on 100 shares and not Rajesh.
If Rajesh buys 100 shares of SBI on 25 April 2021 and the ex-dividend date is 26 April 2021, then Rajesh will have the right to get the dividend.
How do you get Dividend?
Many new investors get confused that dividends come in the balance of their trading account.
Dividend is always credited to the bank account linked to your demat account. If your demat account is in UPSTOX and your demat account is linked with SBI Bank then you will get dividend in your SBI bank account.
What is the effect of dividend on share price?
This is a very interesting topic. Let us see an example to understand the effect of dividend on the share price.
On April 1, SBI, which is operating at a market price of Rs 100, declared a dividend of Rs 5.
The ex-dividend date is 26 April 2021.
Now here the price will increase from Rs 100 to Rs 105 on the dividend announcement date.
Ex-dividend date which is 26th April 2021, Rs 5 will be deducted from the current market price of the share on that day.
If the CMP is running at Rs 115 then the new market price will be Rs 110.
This is done so that no one can take the wrong advantage of declaring dividend. The price is reduced on the ex-dividend date because even if someone buys shares from this date, he does not get the dividend.
What is Dividend Per Share?
DPS shows how much dividend the company has promised to pay per share.
DPS = Total Dividend ÷ Total Number of Shares
What is Dividend Yield?
Dividend Yield is a financial ratio that shows the dividend paying capacity of a stock.
That means, if you are investing in a stock, then how much value are you getting in a year at the market price of that stock.
Dividend Yield = Annual Dividends per share ÷ Current Market Price
If the Fair value of IRCTC share is Rs 10 and the company declared 100% dividend. The market price of IRCTC is Rs 100.
In this, the amount of dividend received per share will be- Rs 10 × 100% = Rs 10
Here the Dividend Yield of IRCTC will be- ( 10 ÷ 1500 ) × 100 = 0.66%
Dividend yield fluctuates continuously depending on the share price.
Cum Dividend and Ex. What is Dividend?
If an investor buys shares before the ex dividend date, then he is entitled to receive the dividend, this is called Cum Dividend.
The investor who buys shares on or after the ex dividend date, does not have the right to receive the dividend, it is called Ex Dividend.
Information on dividend paying companies
You can get information about dividend paying companies by visiting this link- MoneyControl Link
Tax on Dividend
TDS is deducted at the rate of 10% on receipt of dividend above Rs 5,000. Dividend is added to your income and taxable as per your tax slab.
Dividends are a good way to get a regular income. Therefore, to keep your portfolio balanced, always keep some good dividend paying stocks.