What are dividends? How do you get Dividend
Whenever you invest in any stock or 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 are invested in a stock and you get dividend from that stock, then you must be happy to get dividend income.
If you are curious to know about Dividends, then through this article today I will explain Dividend, Why Dividend is given, what is Dividend Record Date and how to get Dividend?
What is Dividend
Dividend is what a company divides out of its net profit to its shareholders. The company 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 profit left after deducting all the expenses, the company can distribute Dividend or Dividend to its shareholders.
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 that much dividend.
Suppose SBI Bank has announced a dividend of ₹ 1 per share. If you have a total of 1,000 shares in SBI Bank, then you will get a total dividend of ₹ 1 × 1,000 = ₹ 1,000.
Why does the company give Dividend?
You have gone above Dividend Meaning, now it comes to why a company pays Dividend?
If a company makes a net profit in a financial year (F/Y), then the company can distribute dividend to its shareholders. 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 furthering the business, then the management can distribute dividend to the shareholders out of the profit.
Dividend to pay or not. Giving is completely a decision of 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, profit-making companies are the ones who 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. Dividend is declared by the company on the basis of this fair value. It is worth noting here that the calculation of Dividend has no relation with the Current Market Price (CMP) of the stock.
Suppose you have some shares of Coal India. The market price of Coal India is ₹ 150 and its fair value is ₹ 10.
If the company has declared 100!^ Dividend then it means a dividend of ₹ 10 per share. Here if the company had declared a dividend of 50% then there would have been a dividend of ₹ 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 a Dividend works
Dividend Summary –
The company earns a net profit or maintains a healthy cash reserve.
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 Dividend per share, when the dividend will be paid and the record date declares.
Finally, the dividend is paid to the shareholders.
Types of Dividend
The company can reward its shareholders by giving dividend in many ways. like –
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
The dividend declared by a company after the release of the final financial statements of the financial year is Final Dividend.
In this, the company has to compulsorily put some part of its profit in the surplus.
Important Dates of Dividend
There are many questions related to the date in dividend like what are record dates, what are ex-dividend dates. It is very important for you to know them.
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.
The record date is also informed on the dividend declaration date itself. Every company has a record book of the shareholders in which the names of all the shareholders are recorded.
It changes 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.
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 Dates are 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 is the date on which 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 ExDividend Date will be 2 days before the record date i.e. 26th April 2021.
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
Case – 1
If Vijay has 100 shares of SBI and 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.
Case – 2
If Mahesh buys 100 shares of SBI on 25th April 2021 and the ex-dividend date is 26th April 2021, then Mahesh 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 Dividend Yield?
Dividend Yield is a financial ratio that shows the dividend paying capacity of a stock. It means to say if you are investing in a stock, then how much value do you get in a year at the market price of that stock have been
Dividend Yield = Annual Dividends per share ÷ Current Market Price
If the fair value of IRCTC share is ₹10 and the company declared 100!^ dividend. The market price of IRCTC is ₹ 100.
The amount of dividend received per share will be – 10 × 100% = ₹ 10
Here the Dividend Yield of IRCTC will be – ( 10 1500 ) × 100 = 0.66%
The dividend yield keeps on fluctuating depending on the share price.
Cum Dividend and Ex. What is Dividend?
If an investor is ex. If he buys shares before the dividend date, then he is entitled to receive the dividend, this is called Cum Dividend.
The investor who ex. If he buys shares on or after the dividend date, then he does not have the right to receive dividend, it is called Ex. It’s called Dividend.
Tax on Dividend
TDS is deducted at the rate of 10% on receipt of dividend above ₹5,000. Dividend income is added to your income and taxable as per your tax slab.
Conclusion – Dividend Meaning
Friends, Dividends are a good way to get a regular income. That’s why to keep your portfolio balanced, always keep some good dividend paying stocks.
Hope you like this information about dividend. Today you know what is Dividend, Dividend meaning and the answer to every question related to it.