In the share market, you must have often heard the name ‘Dividend’ and also that some companies give 100% and some 200% dividends. Big investors regularly earn money from the dividend process and become rich. Warren Buffet who is The world’s most prosperous investor earns crores of rupees every year from the dividend process of just one company. But, you must have some of the questions in your mind like this:
- What are this dividend and its associated process?
- Why do companies pay dividends and when?
- How we can come to know which company gives dividends and how much?
- Advantages and disadvantages of dividends?
- Should I invest in dividend stocks for the long term?
If yes, then don’t worry at all as I am here to answer all these questions in this article and going to give you complete information on what are dividends in the stock market.
Table of Contents
What is the Dividend?
A dividend is part of a company’s profit that it distributes to its shareholders/investors as additional profit. Only a few companies in the stock market give dividends, usually given per share. The dividend is paid by the companies on a quarterly or annual basis. In contrast, companies that do not give dividends prefer to invest their remaining profit back into the future growth or expansion of the company. A dividend represents the share of profit. This means a part of the net profit (net profit) of the company which is given to the shareholders is called a dividend.
What is dividend income?
Dividend income is the money that is received by the investor against his shareholdings. The more shares you have means the more dividend income you will get as it is paid per share.
What is the dividend per share?
The amount of dividend given on one share of the company is called ‘Dividend per share‘. It is also called DPS in short form.
Example of dividend:
If you have 500 shares of WIPRO company and the dividend announced by the company per share is Rs 10, then your dividend income will be Rs (500 × 10 = 5000).
What is Dividend Yield?
Dividend yield means how much (%) dividend the company gives on the share price. Dividend Yield is the ratio that tells us the amount of dividend paid by the company on 1 share. Yield is the dividend in percentage (%) against the current market price of the company.
So: Dividend Yield = Dividend per share / current market price of a share
Suppose that the share price of company XYZ is ₹100 and it has given a dividend of Rs.5 per share, then the dividend yield of the company will be: (5/100) × 100 = 5% This means that by investing in ABC company, you will get a dividend of 5% annually.
Why do investors invest in dividend stocks?
People are excited about the dividend because, in the stock market, you earn profit in two ways-
First, buy the stock at a lower price and sell it at a higher price.
Second through dividend. People want to invest money in dividend-giving stocks because the shareholders will not only get benefits from the increase in share price every year but also get a fixed amount once or twice a year will be a different benefit.
Along with this, some people also think that even if the share price does not increase, even if they invest in a company with a 10% dividend yield, they will still earn more than a 6% return of FD, that too in dividend stocks. There is a reason to invest. The more shares you have in your portfolio, the more dividends you get. That’s why people consider it as a means of earning regular income or passive income from the share market.
Which companies pay dividends?
The dividend is always given by those companies which are in profit, and the companies that are in loss never give dividends. A dividend is given by those companies which have become very big and mature. Because when companies are new and in the process of expanding their business, then they want to invest all their profits in the expansion of their business. Because by investing today’s profit in the industry, they can make more profits in the future.
If a company is giving a dividend, that does not mean that this company is not good for investment. Some companies use that part of the profit for their expansion and when the company expands, their net profit also expands. And when net profit increases, the share price of the company also increases which in turn benefits the investors.
Types of dividend
There are 5 types of dividends:
- cash dividends
- stock dividends
- scrip dividend
- liquidating dividend
- property dividends
Most companies give cash dividends only, so you do not need to know about everything else.
The cash dividend is further divided into two types-
Interim dividend & Final Dividend
What is an interim dividend?
This is the type of dividend that the company can give at any time in the middle of the year, even the company can distribute the interim dividend to the shareholder even 3 to 4 times, so you can say that the dividend is distributed to the investors on a quarterly basis.
What is the final dividend?
This is the dividend that investors get at the end of the year, meaning the dividend you get annually every year is called the ‘Final dividend’.
Who gives dividends?
The Board of members and directors of the company decides whether to give dividends or not. If they feel that they can use the profit to grow the business, then they do not give dividends and if they feel that it is difficult to grow the business, then they distribute some part of the profit among the shareholders.
When is the dividend received?
Not all companies give dividends, so you have to buy shares of those companies which give dividends and you will easily find the list of such companies on websites like Moneycontrol through online search. The company announces the dividend in its AGM i.e. Annual General Meeting.
Important Dividend dates
The dividend is a type of corporate Action and here are some of the important dates you must know.
The Record Date:
This is the date on which your name should appear as a shareholder in the company’s document records. The company giving dividends publicly announces the record date. Companies can give dividends many times in a year, that’s why every time a company announces a record date, the public will come to know when they will have to buy the shares. If your name is not on the shareholder list of the company on the day of the record date then you will not be given a dividend.
Ex-dividend date:
The ex-dividend date is usually one day before the record date means when a company announces a record date then the Ex-dividend date is set 1 day before that. If you want the dividend of a company, then you have to buy the shares of that company before the Ex-dividend date. If you do not have shares before the Ex-dividend date, then you will not get the dividend.
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Final Words:
Dividends can be a great source of passive income for an investor if he wants to get exposure to the equity market and protect the investment at the same time to an extent. But you should not focus your investment primarily on the dividend-paying capacity of the company. If a company is paying dividends means it has no future plans for expansion and that is not a good sign if you are investing in wealth generation in the long run.