What is The Meaning of Dividend
What is Dividend?
A dividend in the share market means a corporate action where the company distributes its profit among the shareholders of the company. A dividend can be a monetary (as cash) or non-monetary (as shares) payment given by a company to its shareholders.
The dividend is distributed from the net income or the retained earnings of the company. The company distributes its entire profit not as dividend but as a part thereof and even it is not mandatory for the company to pay dividends to its shareholders.
Hope your question, ‘what is the meaning of dividend?’ got cleared. Now let’s discuss the types of dividends in the stock market.
Types of Dividends in the Stock Market
The most common types of dividends you’ll find everywhere are cash dividends and stock dividends. So let’s talk about both types in detail.
- Cash Dividend
Through cash dividends, the company gives you free cash according to your shareholding. Well, during share buyback you also get cash from the company but there you give your shares in return.
Cash dividends are generally distributions of money paid out to shareholders as part of a company’s net income of the financial year or retained earnings.
The cash dividend is always declared by the company on the face value (FV) of a share, irrespective of its market value, i.e. the rate of dividend is expressed as a percentage of the face value of the share.
For example, a 100% dividend means if the face value of the share is Rs 1 then you will get Rs 1 per share as a dividend (since 100% of 1 is 1).
- Stock Dividend
The stock dividend looks exactly like a bonus issue because in both the corporate actions the company offers you bonus shares or free shares at no extra cost.
Then, why are there two words if the context is the same?
Well, there is a slight difference between the two.
In the bonus issue, bonus shares are distributed as per a specified ratio like 1:5 which means for every 5 shares held by the shareholder, he/she will get 1 bonus share.
But in the case of a stock dividend, bonus shares are given by the company as a percentage. For example, if the company is distributing a 5% stock dividend, it means that whoever owns 100 shares of that company will get 5 free shares.
Whenever one talks about dividends he/she is referring to cash dividends because between stock and cash dividends, the latter is more popular and common. Generally, the company distributes stock dividends when there is a shortage of money or capital to pay cash dividends.
How Dividend Works in Stock Market
You’ve got to know that a dividend, either stock dividend or cash dividend, is paid per share of the stock. To understand the mechanism of dividends, it is important to know the different dates associated with the payment of dividends.
Important Dividend Dates
- Announcement Date: When a company announces that it is gonna distribute the dividend. On this date company also announced the ex-dividend date, record date, and when it will credit the shares or money in the account of shareholders. The announcement date is also known as the Distribution date.
- Ex-Dividend Date: You must buy shares of the company before this date.
- Record Date: You must have shares in your demat account on this date to be eligible for the dividend. This date falls a day or two after the ex-dividend date but in most cases, it is one day.
The clearing and settlement process takes 'T+2' days (which is 'Trading date + 2 working days', for example if you buy shares today you will get delivery of shares the day after tomorrow) and mostly ex- Dividend date falls 1 day before the record date; Therefore, if you buy shares of a dividend paying company even one day before the ex-dividend date, you will have the shares in your account on the record date, but if you buy the shares on or after the ex-dividend date, you will not be entitled to the dividend. as you will not be holding the shares as on the record date.
- Payment Date:
The date on which the shares (in case of stock dividend) or money (in case of a cash dividend) get credited in your demat or bank account respectively.
What are Dividend Stocks
Dividend stocks are stocks of companies that distribute the common stock dividends to their shareholders on the regular basis like annually, semi-annually, quarterly or monthly basis.
How to Pick Good Dividend Stocks
The necessity of holding dividend stocks is that these stocks provide regular dividends as an income source along with capital appreciation which can be a great way to accumulate wealth.
You must have some basic knowledge of the terms like DPS (Dividend per Share), Dividend Yield, Dividend Payout Ratio etc. so that you can select dividend stocks for your portfolio.
- Dividend Per Share (DPS)
- Dividend Yield
- Dividend Payout Ratio
Effect on Stock Price
When a company announces the dividend, its stock price after the announcement date starts to rise as the demand among the investors for the dividend increases.
On and after the ex-dividend date, the share price starts falling because now investors know that even if they buy the shares, they will not be eligible for dividends as they have lost the opportunity to buy the shares before the ex-dividend date.
The dividend is a way for a company to share the profit with its shareholders. The company is not obligated to pay dividends to its shareholders.
2 ways in which a company can share its profit is either by distributing cash or by giving free shares. A company can give the free shares to the shareholders through another corporate action called bonus issue. So, the common way among the company is to give cash dividends.
Many companies, like TCS, Infosys, etc., give dividends to their shareholders on regular basis and their stock is known as ‘Dividend stock’. Investors look for the best dividend stocks by checking some ratios and terms, like dividend per share, dividend yield and dividend payout ratio, to increase their wealth accumulation.
Like a stock split or bonus issue, dividends do not affect the share price in a factorial way such that if a company announces a 2:1 stock split or a 1:1 bonus issue, the share price would get halved after the corporate action.