If you’ve been in the market for a while you must have heard that This Company has declared this much dividend Or is Going to Pay Dividends. So, We’ll try to explain What is a dividend is and why is it issued through the following Article.
When a publicly-traded company has extra money on hand, it gives the management team some flexibility and options. With that extra cash, they have basically two options:
- Take that money and invest it back in the business. They might decide to do that by expanding their existing operations, building out factories, or possibly acquiring another company that can help them grow.
- Payout some of the money to the Company’s shareholders as a way to share the wealth and reward them for owning the business.
If a company decides to go with the second option, they’ll issue a dividend. Paying Dividends to shareholders is not compulsory.
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What is A Dividend?
A Dividend is a payment from a Company’s Profits to its shareholders. It often comes half yearly but sometimes annually. It is transferred to the bank account of the shareholders according to the number of shares held.
Often, Investors that are looking to have income-generating investments take dividend-paying stocks in their Portfolio. Understanding what is a Dividend is one thing. But it’s equally important to realize what kind of companies tend to issue dividends.
Companies tend to pay dividends once they’ve put enough money aside to fuel their own growth.
What Kind of Companies Pay Dividends?
Cash Rich Companies often give attractive dividends to its investors having met their Expansion Needs. Think about it- if you have some new business, wouldn’t you rather put your money in it and meaningfully grow your company, rather than just paying out money to shareholders.
For this reason, most dividend payers are not high-flying growth companies But, more mature companies that have established businesses with predictable sales. They’re still investing in themselves, but often, more than enough money is leftover. So, They send some shareholders’ way. These companies will start paying out because having a dividend tends to attract income investors or people that are happy to hold stock over long periods and simply collect payments. For this reason, companies generally only start paying a dividend once they’re convinced they’ll maintain it well into the future.
You will Notice that most of the High Dividend Paying Stocks in India are PSU’s. This is because in case of PSU’s the Indian Govt is a Majority shareholder. So, Such Companies declare Most of the Profits as dividends. And, Most of the Dividend Declared goes to the Government.
The price of dividend-paying stocks is very stable. Historically, the price of dividend-paying stocks wavers less than other stocks. Because people continue to “hold on” to their dividend stocks for a longer period of time (sometimes like forever). Because they continue to earn dividend no matter what. There is no need for them to sell their dividend stock holdings.
There are Two significant numbers to keep in mind looking at dividends:
Dividend Yield and Payout Ratio.
1. Dividend Yield measures how much you’re receiving in dividends compared to how much it costs to buy the share. The equation for this would be dividend payment received over the price of the stock.
Dividend Yield = Dividend per Share/ Current Market price of Share
2. Payout Ratio is dividend payments divided by net income. If a company’s payout ratio spikes, it means they could have to reduce their dividend down the road unless business results turn around. Most Often, such companies have great, resilient business models that can weather economic downturns and continue to reward shareholders.
Payout Ratio = Yearly dividend per share / earnings per share
You Need to check If the Company has been Constantly paying Dividends from the past few years and also there is Constant growth in the amount of Dividend paid.
If a share checks all those boxes, you can probably bet on its dividends to keep paying you.
Important Dividend Dates
Dividend payments follow a chronological order of events and therefore the associated dates are important to determine the shareholders who qualify for receiving the dividend payment. Following are some of the Important Dividend Dates:
- Announcement Date: Dividends are announced by company management on the announcement date, and must be approved by the shareholders before they will be paid.
- Ex-Dividend Date: The date on which the dividend eligibility expires is termed the ex-dividend date or just the ex-date. for example, if a stock has an ex-date of Monday, May 16 then shareholders who buy the stock on or that day won’t qualify to receive the dividend as they’re buying it on or after the dividend expiry date. Shareholders who buy the stock one business day before the ex-date – that’s on Friday, May 15, or earlier – will receive the dividend.
- Record Date: The record date is that the deadline, established by the corporates so as to determine which shareholders are eligible to receive a dividend or distribution. Those Shareholders who have the stocks settled in their DEMAT on Record Date get the dividend.
So, Shares that are Bought at least 1 day before the ex-dividend date are the ones eligible for receiving the dividend announced by a company.
Through this Post, we tried answering these question:-
- What is a Dividend?
- What kind of Companies pay Dividends?
- How to pick a Dividend Paying Share?
- Important Dividend Dates
Don’t forget to check our curated List of Upcoming & Ongoing Dividends. Comment down your favourite Dividend Paying Stocks. Happy Investing!