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What is a Dividend?
A dividend is an amount that the company returns to its shareholders from its profits. Every established company has profits. It can either use these profits for its growth, invest them for its expansion, or return some money to its shareholders. Most companies follow both things in a definite proportion. They return some money to their shareholders and reinvest some money into their expansion. A company pays a dividend on face value (FV) of the share.
Suppose a company named X whose share price is Rs 1000 and the face value is Rs 10. If X announces a 200% dividend, then
Dividend= 200% of FV= 200% of Rs 10= Rs 20
Therefore, the shareholders of X will get a dividend of Rs 20 for holding one share.
Why do companies give a dividend?
If a company does not have to grow business, does not launch new products, does not have to do marketing, branding, or advertising in the future, such a company can give dividends in the near term. If the company does not share the profits with the shareholders, it will remain like this, and if it shares the profit, then the shareholders will get some money, and they will be happy. The shareholders’ dividend is their income, which is over and above the capital gains they are merely earning from the stock investment.
To give dividends to the shareholders is not compulsory for the company. If a company is giving regular dividends, there is no guarantee that it will give regular dividends in the future. A dividend has to be given or not; this decision is made entirely by the company’s board of directors. Small companies rarely give dividends as they spent most of their profit on their growth and expansion.
Important Dividend Dates
Dividends distribution follows a sequence of dates starting from the company’s decision till payment of dividends to shareholders.
- Announcement Date: It is the date on which the company announces dividends.
- Record Date: The date on which investors must have shares in their Demat account is to be eligible for dividends announced by the company.
- Ex-date: It is usually set one trading day before the record date. On this date, the shares start trading at revised rates. You must have shares before the ex-date to get the entitlement for dividends. If you purchase the shares on the ex-date, it will not be credited to your Demat account on the record date as per the T+2 settlement. Therefore, you will not be eligible for the dividends, but the person who sold the shares to you will be eligible for the dividends.
- Payment Date: The company made payment of dividends to the shareholders on this date, and the money gets credited to their account.
When a company announces dividends, its share price drops by the same amount. For example, if the share price of a company is Rs 50 and face value is Rs 10, and it has announced a 200% dividend, i.e., Rs 2, then on the ex-date of the dividend, its share price will fall by Rs 2 and will become Rs 48. It’s because now the assets of Rs 2 per share have reduced for the company. So automatically, its valuation will fall accordingly.
Why do people invest when the company announces dividends?
When a company announces dividends, the stock market takes it as a positive signal. The company indicates that they have enough cash to continue its operation; usually, their business is doing well, and they are working on expansion. Still, they also have so much money that they can return some to the shareholders. That’s why when shareholders invest in dividend-paying companies, they do so not only to get additional income but also to invest in a good company.
Taxation of Dividends
Dividends were tax-free up to Rs 10 lakh until FY20. The company declaring dividend already paid Dividend Distribution Tax (DDT) before making payment to the shareholders. Now, the Finance Act 2020 says that all the dividends received on or after 01 Apr 2020 are taxable in the shareholders’ hands.
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