What is Dividend: Definition, Types & Calculation Of Dividend Income

A dividend is a payment made by a corporation to its shareholders that is decided by the board of trustees. Dividend payments are frequently made quarterly and might take the form of cash payments or stock reinvestments. The dividend yield, which is the dividend per share, is stated as a percentage of the stock price of a corporation, for example, 2.5%. If a common shareholder of a dividend-paying company owns the shares on the ex-dividend date or earlier, they are eligible to receive a payment.

How does the dividend work?

A dividend is given per share of stock; for example, if a corporation pays Rs.160 annual cash dividend and you own 30 shares, your annual dividend payment would be Rs. 4700.

If a corporation must reduce its dividends, it moves up the ladder starting at the bottom. Bondholders will be paid first, followed by preferred shareholders, and if there is any money left over, common stockholders would be compensated. Even in prosperous times, businesses still use this hierarchy to choose how to spend their cash. Preferred shareholders frequently receive payment first and receive a bigger dividend than common shares.

Types of Dividend

A firm may distribute dividends in a variety of ways. Following is a few of the dividend types:

Cash Dividend

We refer to it as a cash dividend when a corporation distributes cash to its shareholders in the form of a percentage of its net earnings.

Stock Dividend or Bonus

A stock dividend is a dividend in which the corporation offers shares as a form of payment rather than cash. When a business wants to reward its shareholders but does not want to pay out cash, it will give stock dividends. These are also known as bonus shares.

Repurchasing of Stock

With this kind of payout, the shareholder has the opportunity to return his shares to the business at a set price. This fixed price is typically higher than the current market price.

Advantages and Disadvantages of Dividends

Paying dividends has the significant benefit of fostering shareholder loyalty. Companies that have paid dividends in the past are expected to try to keep doing so. Some more advantages of dividends are:

·       Preference of Investors

·       Stability

·       Without Selling, Gains

·       Information Transmission

The main drawback of paying dividends is that the money distributed to investors cannot be used to expand the company. A company’s share value will rise if it can improve sales and earnings because more investors will be drawn to the shares. If a firm distributes an excessive amount of its income as dividends, it won’t be able to support expansion and its stock price won’t rise. Some more disadvantages of dividend are:

·       Retained Earnings declined

·       Affects the Company’s Growth

·       Logistics

Impact of dividend on share price

The price of the shares typically rises once a stock dividend is declared. A stock dividend lowers the market valuation per common share, which lowers the stock price because it increases the number of shares outstanding while the company’s worth remains steady.

Naturally, the announcement of a dividend motivates investors to buy stock. Investors are prepared to pay a premium because they are aware that if they buy the shares before the ex-dividend period, ie, stock that isn’t yet valued for the subsequent dividend, they will earn a dividend. As a result, a stock’s price rises in the days preceding the ex-dividend date. Generally speaking, the rise is equal to the dividend sum, but the exact price change is determined by market action rather than by a regulating body.

How is dividend income calculated?

Dividend yield is determined by dividing the current yearly dividend per share of a corporation by the value of stock at the time. A corporation, for instance, with a stock price of Rs. 100 and a dividend payout of Rs. 4 per share, has a 4% dividend yield. The corporation may forecast an improvement in dividend if it anticipates growth in earnings and sales. The dividend may remain unchanged if the corporation anticipates slower and/or declining earnings and revenue. All of these elements will affect dividend yield.

Dividend Payout ratio v/s Dividend Yields

The dividend yield evaluates the relationship between the dividend payment and the share value of the organization. Instead, the dividend payout ratio contrasts the dividend payment with per share earnings for the company.

The dividend yield displays the total amount of dividend payments made by a corporation in a given year. The yield is shown as a percentage rather than as a precise indian currency figure. This makes it simpler to see how much profit the shareholder obtains from dividends per rupees invested. The connection between net earnings and dividend payouts to shareholders is highlighted by the dividend payout ratio. When examining stocks, this number isn’t often clearly displayed, but you can always search for income and dividend entries on the balance sheet of the issuing business.

Dividend v/s Buyback

Dividend payments and stock repurchases are the two main methods that businesses reward their shareholders. More and more blue chips, or well-known businesses, are combining the two. 

Chronology of Dividend Issue

The sequence of events that occur when a firm chooses to pay dividends to its shareholders is referred to as the “dividend chronology.” The proclamation date, ex-dividend date, settlement date, and payment date are all listed in this chronology, in that sequence. The day a firm declares its intention to pay a dividend in a statement is known as the declaration date. The corporation also discloses the payment date and the holder-of-record date on the aforementioned date.

Choosing Dividend Stocks

A tried-and-true strategy for building wealth is dividend investment, which provides inflation protection in a way that bonds do not. Finding outstanding dividend-paying businesses, however, can be difficult. The main characteristics buyers should watch out for when looking for reliable dividend-paying stocks.

·       Strong Cash, Low Expectations of Earnings

·       Don’t Get into Debt

·       Look at Sector Trends

·       Discover the Fundamentals of Trading and Investing

Best dividend paying stocks 

If you have funds to invest in dividend-paying stocks but aren’t sure which ones to choose, don’t stress. Examine these companies based on their fundamentals and financials, and assist yourself in selecting the Indian stocks that offer the highest dividend yield as of 2022.

SL No.	Company Name	PE Ratio	Dividend Yield
1	Coal India Limited	7.54	10.34%
2	Indian Oil Corporation Limited	4.91	10.36%
3	Rural Electrification Corporation Limited	3.19	9.39%
4	Power Finance Corporation Limited	2.76	8.14%
5	Hindustan Petroleum Corporation Limited	3.95	7.84%
6	PTC India Limited	7.28	6.79%
7	NMDC Limited	6.32	5.74%
8	Majestic Auto Limited	6.98	5.61%
9	HUDCO Limited	5.04	5.48%
10	Geekery Wires Limited	12.90	5.26%

Conclusion

The payment of dividends typically has little impact on the stock price of a company’s underlying value. Early-stage businesses with strong growth rates rarely pay dividends because they want to reinvest the majority of their earnings to support continued expansion and high growth rates. Established businesses, on the other hand, make an effort to reward devoted investors with consistent dividend payments.

FAQs

Q. What is the dividend payout period?

Upon declaration, the dividend must be paid within thirty days.

Q. Can a dividend be revoked after it has been declared?

Once announced, a dividend becomes a debt and cannot be repealed.

Q. Whether or not dividends must be deposited in a separate bank account.

Within five days after the declaration date, the dividend must be deposited in a separate bank account. Additionally in Private Limited Companies.

Q. Is it possible to send dividends to anyone else?

The Member may also direct the payment of the Dividend to another individual or to his bank.

Q. Who has the authority to declare the “Final Dividend”?

The “Final Dividend” is the Dividend that the Board of Directors recommends and that the Members proclaim at an annual general meeting.