A dividend is a distribution of a company’s surplus to its shareholders. The shareholders can be equity or preference shareholders. When a company makes profits, it can either re-invest the same in the business and retain the earnings or distribute a part of it as dividends and retain the balance as retained earnings. Dividend acts as a reward or return on the shareholders’ investment in the company. A higher dividend-paying company reinforces the trust of the shareholder in the company and he may continue to be a shareholder in the company. A dividend is always declared on the face value of the share as a percentage and not on the market values.
A dividend can be either Interim and/or final. Interim dividends are declared usually when the interim or quarterly financial results are declared by the company. A final dividend is a dividend that is declared at the end of the financial year when the audited financial reports are placed before the board for its approval.
When a dividend is declared by the board, the board also announces certain dates the purpose of which needs to be understood else an investor stands to lose out on receiving his share of dividends. Let us enumerate them.
SEBI introduced a new regulation 43A in 2015, which mandated the top 1000 companies by market capitalisation as on 31st March of every year to formulate a dividend distribution policy (DDP) to include the following
SEBI also mandated them to disclose the DDP voluntarily disclose in their annual reports and websites.
Dividends are rewards distributed by companies out of their profits. They are usually declared during quarterly results as interim dividends or annually when the accounts are audited known as a final dividend.
One should buy shares at least 2 days before the record date. Any purchase of share on or after the record date will not be entitled to a dividend.
People often get confused with the rate of dividend and dividend pay-out ratio. A dividend is declared as a percentage of face value. For example, if a company declares a 10% dividend. Then it means the company will pay a dividend of 10% on the face value. Assuming the face value to be Rs.10 per share, the dividend declared will be Rs.1 per share.
The dividend payout ratio is a ratio of the aggregate or total dividend paid to the shareholders divided by the net income of the company. A higher payout ratio is a sign of a healthy balance sheet
The dividend yield is another area of confusion. Dividend yield is a percentage of dividend per share divided by market price per share. Higher dividend yield companies give out more cash as dividends and retain less for future growth. One should carefully consider this indicator before investing.
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