Everything to Know about Dividends: Meaning, Types, Payment Method and More
A stock’s value is influenced greatly by the market conditions and its demand among investors. It remains incredibly difficult to predict which stocks will keep their high demand in the future. However, stocks of well-known brands that are known to offer steady and dependable dividend income tend to keep their high demand regardless of market conditions.
Dividend yield stocks are a great addition to any stock portfolio. They are also a great long-term investment as they continue to pay money over many years.
But, before we discuss how to find the best dividend-paying stocks, let us understand what dividends are and how they work.
What Are Dividends?
When you invest in a company’s shares you become a part owner of the company. The company sometimes decides to share a part of its profit with its shareholders. The part of the profits of a company that it distributes to shareholders is called the stock’s dividends.
These are the shares of profit that a company distributes among their shareholders. But not the entire portion of profits is distributed among shareholders; there is also a portion that is retained, which is reinvested in its business operations.
Types of Dividend Payments
Mainly two types of dividends are paid out which are known as the interim dividend and final dividend.
- Interim Dividends: Companies can declare dividends every quarter or on a half-yearly basis. The dividend that is declared before the firm’s annual general meeting (AGM) is known as its interim dividend. Companies issuing these interim dividends are free to cancel or modify them after they are announced.
- Final Dividends: These are the annual dividends that are announced by a company based on its performance in a financial year. These are announced along with the company’s financials. Final dividends cannot be cancelled once they are announced by an issuing company.
There are four ways payment of dividends:
- Stock Dividends: These are the dividends issued by companies in the form of bonus shares.
- Cash Dividends: These are the most common type of dividends declared by companies. Here the companies pay a fixed amount of cash per share.
- Property Dividends: When a company is issuing shares of subsidiary companies where the companies are independent but majorly owned by the same owners.
- Scrip dividends: When a company is unable to pay out cash dividends at once then the company can offer scrips or promissory notes for paying dividends in future.
How Do Indian Companies Pay Dividends?
The dividend payment process of Indian companies comprises several stages which are segregated by dates. This includes the dividend declaration date, record date, ex-dividend date and the payment date
- Dividend Declaration Date: Based on a company board’s decision, dividends are declared on the dividend declaration date (both interim and final). For accounting purposes, this date is termed the dividend declaration date.
- Record Date- It is the cut-off date released by the company to figure out exactly which shareholders are eligible for getting the dividend payout. As the shareholders of an actively-traded stock continue to change, having a cut-off date is necessary.
- The Ex-dividend date- A company pays dividends only to those shareholders who have purchased its shares on or before the ex-dividend date. Anyone purchasing its shares after the ex-dividend date is not entitled to receive dividends.
- The Payment Date – The payment date is the date at which the dividend is paid out to the shareholders. This date is decided on the dividend declaration date itself and this payment date is the final stage of the process.
Top Dividend paying stocks in India
These are currently the top-performing dividend-yielding stocks in India as per National Stock Exchange (NSE).
- Vardhman Acryli
- Hinduja Global
- Indian Card
- Savita Oil Tech
- Banco Products
Key Factors to Consider before Investing in Dividend-Yielding Stocks
Here are several factors that you need to consider as an investor before investing in dividend-yielding stocks
- Interpretation of Dividend Yield Ratio: If a company’s dividend-yield ratio is very high that means it may not be reinvesting most of its profits and distributing most of its profits in the form of dividends. Such information can easily be derived by just looking into a stock’s dividend yield ratio. Investors must keep this in mind before choosing a dividend-yielding stock.
- Dividend Analysis: Ratios associated with analysing dividends should only be used to analyse the dividend pay-out situations of the company. This should not positively or negatively influence your final investment decision.
- Absolute Dividend Numbers: A company with a high dividend yield may not be an ideal investment. The dividend yield should not be the sole factor in choosing the company’s stock. It might happen that a high-yielding dividend stock may turn out to be a bad investment as the situation is not always clear.
Factors Depending on Which Dividends Are Announced in India
There are several factors based on which Indian companies declare dividends which are as follows:
- Company’s Profit: Company profit is one of the most important factors to be considered. The higher the profit the higher will the possibility of declaring dividends.
- Dividend Pay-out Tendency: If the company always pays out dividends historically then there is a high chance that dividends will be declared. This encourages the investors to invest in that particular stock to make extra earnings from the dividends apart from the capital gains.
- Dividend Trends of Similar Industries: The dividend trends in similar industries also play an important role because companies usually try to match their competitor’s actions.
- Company’s Reinvestment Nature: There are also times when a company may be planning for an expansion. At such a time, the company may not pay dividends. Instead, they will likely reinvest their profits back into business, to fund their expansion.
To sum up, dividends are both useful for both the investors and the company as well. For the companies, it is a fruitful way to retain investors and attract new investors, thus creating higher demand among the investors. The investor also gets the opportunity to earn an additional income apart from the capital gains.
Frequently Asked Questions
Is there any limit on dividend payments?
Yes, there is a limit to paying out share dividends. The maximum amount of share dividends that a company can pay its shareholders is limited to 20% of its previous issue of shares. However, this limit is not taken into consideration in case of a stock split.
How do I receive the dividend payments?
The amount of dividends is credited to your registered bank account. This payout takes place on the payment date. You as an investor of the company are eligible for dividend payments only if you have invested on or before the announced ex-dividend date.
When is a company not allowed to pay out dividends?
Any company which fails to comply with the provisions of Section 73 and Section and 74 (Repayment of Deposits, etc., Accepted Before Commencement of this Act) of the Companies Act, 2013 (Prohibition on Acceptance of Deposits from Public) is not allowed to pay out dividends.
How does a share price react to dividend payouts?
Investors may find that share prices of dividend-yielding stocks increase upon the declaration of dividend payouts. However, when its ex-dividend date passes, investors tend to lose interest in the stock due to its premium price. Over time, the stock prices stabilise and no longer depend on dividends.