The “Dividend” is a word often thrown around by the people in the stock market. If a company is paying dividends, then it is a good safe investment. Analysts across the markets always try to value a company by the amount of Dividend it gives. If a company has a healthy track record of paying dividends along with growth, then it’s a company that can turn into a multi-bagger. If the company gives dividends and regularly buybacks shares, then it is considered one of the best corporate governance companies.
But, What is a dividend in a stock? “Dividend” is nothing but the distribution of a certain portion of the Company’s profits to its shareholders. A company that is constantly earning profits in excess of its spending requirements generally distributes some profits of the company to its shareholders.
Does this mean all shareholders get dividends? Yes, all the shareholders who own the stock receive Dividends. But there is a certain cut-off date before which you need to own the shares in your Demat account.
Many questions like these arise in investors mind when they think of dividends. Do i have to pay tax? when do i buy? where will the dividend money go?
So let us further look at the various important keywords that YOU NEED to KNOW to understand everything about dividends.
- 1 Who decides the Dividends?
- 2 Interim Dividend vs Final Dividend?
- 3 What is Special Dividend?
- 4 What is Dividend Payout Ratio?
- 5 What is Dividend Yield?
- 6 How is dividend adjusted in stock price?
- 7 Dates related to Dividends:
- 8 How much tax I have to pay on Dividends income?
- 9 Conclusion
Who decides the Dividends?
Each company will have a Dividend Policy which outlines the Dividend payments, When to pay and other information. Interim Dividends are approved by Board of directors and Final Dividends are approved by shareholders. To check out the Dividend Policy of BPCL Click here. It will give you an idea of the company’s dividend policy.
Not all Companies pay dividends. There are some companies that are profitbale but still they don’t pay dividends. They would rather give value to the investors by buying back their own shares.
Interim Dividend vs Final Dividend?
Dividends can be paid either during the financial year or after the Annual General Meeting(AGM).
The Dividend paid during the financial year is called an “Interim Dividend“. Interim Dividends are authorized by the Board of the Company.
The Dividend paid after the financial year is completed is called as “Final Dividend“. Final Dividend is recommended by the Board of the company and has to be approved by its shareholders in the Annual General Meeting(AGM).
AGM is the meeting where the company talks about its performance for the year gone by and talks about the upcoming plans. It also is a meeting to approve, disapprove or change Board members by way of e-voting by the shareholders. Dividend approval is also confirmed by a way of e-Voting by the shareholders. So if you are a shareholder always voice your opinion during e-Voting so that you also contribute your view to the company.
Recently, Bharti Airtel conducted its AGM, and during the AGM, the company was highly bullish and had plans of investing and expanding its business. So, information like company intent, plan, and investment is communicated to its shareholders by the company.
Also a recent incident, during Eicher Motors AGM, when shareholders disapproved of Mr. Siddharth Lal to be reappointed as MD of Eicher motors and his propsed salary hike. But the Board members supported Mr Lal and appointed him as MD with a revised pay package, but this decision is subjected to the Eicher motor shareholders approving of this decision. To know more about this story, Click here to know more.
What is Special Dividend?
Special Dividends are given by the company during exceptional times. It is a non recurring dividend paid by the company. Special Dividends have a Dividend Yield of more than 5%.
For eg, BPCL declared a Final Dividend of Rs.58/- per share. It consists of Rs. 35 per share as Special dividend and Rs. 23 per share as Final Dividend.
BPCL is giving the Special devidend as it recently sold stake in Numaligarh Refinery and the money from those proceeds is decided to be given to the shareholders. BPCL also gave a interim dividend of Rs.5/- per share earlier in 2021. The Ex Dividend date for BPCL Final Dividend is 16 September2021. So if you wish to take advantage of dividend received then you will have to buy the stock before 15 September 2021. Check out more about the important dates associated with Dividends.
What is Dividend Payout Ratio?
Dividend payout Ratio is the ratio of the Dividends Paid divided by the Net Earnings of the company.
Dividend Payout ratio = Dividends Paid/ Net Earnings
The remaining profits which is not distributed as Dividends is Put in the company’s Free Reserves and Surplus.
Net Earnings – Dividends Paid = Free Reserves and Surplus Cash
This cash can be used by company for acquisitions or during emergencies as a safety measure.
What is Dividend Yield?
Dividend Yield is the ratio of the Company’s Final Dividend to the market capitalization on the ex-Dividend date.
Market capitalization is the product of Total no. of Outstanding Shares and Stock price.
Consider a company with 1,00,000 shares. If the company has paid Rs. 5/- per share as Final Dividend at a stock price of Rs. 100/-.
So, Dividend calculation will be as follows.
Final Dividend Value= 5 * 1,00,000 = Rs. 5,00,000/-
Market Cap during Final Dividend = 100 * 1,00,000 = Rs. 1,00,00,000/-
Dividend Yield = (5,00,000/1,00,00,000) *100 = 5%
One can also simply divide the Dividend per share with the stock price on ex dividend day to get the dividend yield.
Dividend Yield = (5/100)*100 = 5%
Either way you can find out the dividend yield.
You can also find the Dividend yield directly from website like moneycontrol.com as shown below. Just go to Moneycontrol.com and search for the stock, in this case BPCL. You will find the Dividend yield in the overview section of the page as you scroll down.
Check also: Basics about Stock Market YOU NEED to KNOW
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How is dividend adjusted in stock price?
When dividends are given to shareholders, its value gets adjusted in the stock price. The stock price gets adjusted on ex-dividend date which is explaied later in detail.
Consider the following example.
Stock Price Previous to Ex Dividend day = Rs. 100/-
Dividend declared = Rs. 10/-
Stock Price on Ex-Dividend day = Rs. 90/- (100 – 10)
So you see on Ex-Dividend day, the stock price gets adjusted with the dividend.
Dividends are given to those shareholders who own the shares in their demat account before a certain date. Lets look at the important dates that you should know to fully take advantage of Dividends.
It is the day the Board of Members approve of the Dividend. On Declaration day, The Dividend per share is approved by Board members and shared with the shareholders.
Cum Dividend Date
It is the most important date to remember if you wish to take advantage of the Dividends. It is the Last day to buy shares to be eligible to receive Dividends. It is one day prior to Ex-Dividend date.
Ex Dividend Date
On this day, the Dividend is adjusted in the Stock price of the company. Ex Dividend date is one working day prior to Record date. If you buy shares on Ex dividend shares you will not receive dividends.
This is the date to RECORD the Eligible shareholders who will receive dividends. If you have bought the stock on Record date, you will NOT Receive Dividend since it is not in your Demat account. It takes T+2 days for the bought shares to be credited to your Demat account. However, if you sell shares on Record date, you will still receive Dividends.
There should be a minimum gap of 5 clear working days between the Declaration date and Record date.
Payment Date/Issue Date
Once the shareholders are recorded, the dividend is paid out to the shareholders within 30 days of its approval. Eligible shareholders will receive the Dividend amount directly in their bank account before the Payment date.
How much tax I have to pay on Dividends income?
Investors have to pay tax on income through dividends as per their tax slab rate. So if you are in the 10% tax slab rate, you need to pay 10% tax on your dividends received.
Dividends form an important form of any investors analysis. Dividends are proof of the company being profitable and bringing value to investors. So whether to invest in a company paying dividends remains to be seen. Are you going to buy a dividend company share?.
- What is dividend in stock market with example?
Dividends are part of the company's profits distributed to its shareholders. For example, Vedanta recently announced a dividend of Rs. 18.5 per share to be distributed with its shareholders. Each shareholder holding a share will be given Rs. 18.5 per share. So if you own 10 Vedanta shares, you will receive Rs. 185.
- Is Dividend paid monthly?
Dividends are usually paid Annually after AGM. Some companies also pay dividends during the financial year. Also in some cases, Special dividend is also paid. Special dividend is different than interim and final dividend.
- Who is eligible for dividend?
Any Person who owns the shares in their Demat account Before the Exdividend date is eligible for Dividends.
- How long must you own the stock to get a dividend?
You need to buy the shares at least on the Cum dividend date and hold it till the Exdividend date. You will have to own shares for at least 2 days before you can sell and still earn dividend. You can sell shares on Record date and still earn the dividend.