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A dividend is a process of paying out some profit back to its eligible shareholder by the company. It is generally made by public listed companies which means it is a process followed by the companies operating in the secondary stock market. So, before understanding the dividend process, you must know the type of stock market.

what is dividend and how it works
dividend process

Type of stock market

The primary stock market is the place where securities i.e bonds and shares are sold by the company to the public for the first time. And through the Initial Public Offering (IPO) process, the company goes to the public for the very first time, so IPO comes under the purview of the primary share market. Similarly, a govt organization can raise debt capital from the market by issuing long and short-term bonds at a pre-decided coupon rate which depends on existing interest rates.

So, the essence of the primary market is that here you can purchase the securities from the issuers of the security i.e shares from the companies in case of equity and bonds from the organization in case of debt instruments.

A secondary share market is a place where securities are traded at a fluctuating price depending on the demand and supply mechanism. Here, the securities are traded between the traders or investors only and the issuer of the share remains out of this market. Hence, the stock market is an example of the secondary market. The price of the security/share also depends on many other factors but primarily on demand-supply.

If you purchase an equity share in the stock market, it is supplied by another investor only who wants to sell those shares, and the company to which the share belongs doesn’t have any role in it. In the same way, bonds are traded here and you can trade them for profits.

Dividend Process

It is a process of paying out some profit back to its eligible shareholder the company. It is generally made by public listed companies and it can be taken as a reward to its shareholders by the company. It is just a way to share the profit and it is not obligatory for the company to share it. The company can retain the profit and can use it for future expansion. Paying Dividends is a decision taken by the board of directors but must be approved by the shareholders before paying. The company has to pass through four stages and those are:

Declaration Date

is the date when the management of the company decided to pay out the dividends to its investors in the near future and the date for paying the dividend will be different from the declaration date. It means it is just an announcement date and investors are not going to get credited with payouts at this date. Here, the size of the dividend, Ex-date and payment date is announced by the board of directors. The declaration date has the least importance for investors because here only communication is made and actual payments happen at a later stage.

Record Date

It is the second stage in the Dividend process and the company will check its records for shareholders and decide who will be eligible or not. Only registered shareholders in the records book of the company will receive the payouts. This date is important because you must be having the shares of the company so as to reflect in records, and it will make you eligible to receive dividend payouts. You must purchase the shares of that company two days prior to the record date to be eligible for dividends.

Ex-Dividend date or Ex Date

This is the third stage in the process of dividend payout and it usually falls one day prior to the Record Date. If you have purchased shares of the company on the Ex-date or after it, you are not eligible to receive payouts. You must have shared at least one day prior to the record date i.e you must have an existing share on Ex-date. But if you purchase a share on the Ex-date, you are not eligible, so you must purchase the share at least one day prior to Ex-date and two days prior to the Record date to be eligible for dividend payout.

Payment date

It is the last and final stage of the process, and as its name says shareholders will be paid dividends on this date.

Example

Suppose On 2nd March 2020, Coal India notifies its shareholders that a dividend will be paid on 25 March 2020. Coal India further stipulates that all shareholders that are registered on the company’s books before 16 March 2020, will be eligible for the payment. So, in this scenario for Coal India Company, the declaration date is 2nd March 2020, and the payment date is 25 March 2020. And the record date is 16 March 2020, and the ex-dividend date will be 15 March 2020, one day prior to the record date.

As Indian Market follows T+2 days of settlement cycle i.e it will take 2 days for share to get credited into your account once purchased. Hence you must buy the share on 14th March or before to be eligible for the payout. If you are purchasing a share on 15th March or after that you will not get the dividend as the seller will receive the payout.

Ex-date = Record Date – 1 day

You must have share = Ex-Date – 1 day OR Record Date – 2 days minimum

dividend payout

What is Dividend yield?

It is the total amount paid by the company to its shareholders in a year against the current market price of the share of that company. Since it is a relative price hence it is expressed in percentage and shows the payout by the company annually. The dividend yield is calculated by dividing the value of dividends paid per share in a particular year by the value of one share of stock.

Things to know about Dividend

Companies who have a monopoly in their area of operation or less need of marketing go for higher payouts to their investors

Generally, stable companies or govt funded companies provide more dividend

A dividend payout of more than 4% annual is considered a good payout but if the company is paying more than 15% in a year, then it can be a risky and alarming thing for investors

The company providing a higher payout is not always good because dividend payout is taken as a decline in the price of a share

More dividend payout is also taken as less scope of growth for their company


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