What is Dividend?

There are a lot of term in share market it is very important to understand them, now lets understand What is Dividend? A dividend is a reward paid to the shareholders for their investment in a company’s equity, and it usually comes from the net profits of a company. and is determined by the company’s board of Directors. They are paid regularly and are one of how investors earn returns by investing in stocks.

How Dividend Stocks Can Supercharge Your Income

When the company makes a profit, it can distribute a share of the profit to the shareholders if they want. This part of the profit is called a dividend.

For example,

We have 1000 shares of a company and that company has declared a dividend of Rs 5 per share, the total dividend per 1000 shares will be Rs 5000. The dividend is often quoted as the face value of the company.

If we have bought shares of the company and have kept them, whenever the company gives a dividend, it will come to our bank account or it will happen till the time the shares of our company are in our demat account.

The board of directors can choose to issue dividends over various time frames and with different payout rates. Dividends can be paid at a scheduled frequency, such as monthly, quarterly, or annually.

How dividend is paid to shareholders.

A dividend’s value is determined per share and is to be paid equally to all shareholders of the same class (common, preferred, etc.). The payment must be approved by the Board of Directors.

When a dividend is declared, it will then be paid on a certain date, known as the payable date.

Dividend-paying companies

The top dividend payers are frequently bigger, established companies with stable revenues, and the following industry categories consistently pay dividends:

essential supplies

Gas and oil

Financial and banking institutions

Drugs and healthcare

Utilities

Important Dividend Dates

Dividend payments follow a chronological order of events, and the associated dates are important to determining which shareholders qualify to receive the dividend payment.

Announcement date: Dividends are announced by company management on the announcement date (or declaration date) and must be approved by the shareholders before they can be paid.
Ex-dividend date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to receive the dividend. Shareholders who own the stock one business day prior to the ex-date, on Friday, May 2, or earlier, qualify for the distribution.
Record date: The record date is the cutoff date, established by the company to determine which shareholders are eligible to receive a dividend or distribution.
Payment date: The company issues the payment of the dividend on the payment date, which is when the money gets credited to investors’ accounts.

Types of Dividends

There are various types of dividends a company can pay to its shareholders. Below is a list and a brief description of the most common types that shareholders receive.

Types include:

Cash – this is the payment of actual cash from the company directly to the shareholders and is the most common type of payment. The payment is usually made electronically (wire transfer), but may also be paid by check or cash.
Stock – stock dividends are paid out to shareholders by issuing new shares in the company. These are paid out based on the number of shares the investor already owns.
Assets – a company is not limited to paying distributions to its shareholders in the form of cash or shares. A company may also pay out other assets such as investment securities, physical assets, and real estate, although this is not a common practice.
Special – a special dividend is one that’s paid outside of a company’s regular policy (i.e., quarterly, annual, etc.). It is usually the result of having excess cash on hand for one reason or another.
Common – this refers to the class of shareholders (i.e., common shareholders), not what’s actually being received as payment.
Preferred – this also refers to the class of shareholders receiving the payment.
Other – other, less common, types of financial assets can be paid out as dividends, such as options, warrants, shares in a new spin-out company, etc.

Dividend Effect on Stock Prices

It is important to remember that dividend payments to shareholders can not have an impact on the company’s total worth. In any case, this kind of action usually results in a reduction of the venture’s total equity value by the precise amount of the dividend. To clarify, once a dividend is paid out, it is permanently debited from the accounting books.

In addition, a firm’s share prices rise significantly in response to a dividend announcement, which is determined by market activity. They are more likely to pay more in the expectation of dividend payments. However, after the dividend eligibility date passes, the share values begin to decrease by an equivalent amount. This kind of decline typically happens when new investors are unwilling to pay the premium because they are not considered qualified to collect dividends.

Similarly, the value gain of the stock may exceed the dividend offered if it is expected that the market will stay positive until an ex-dividend date. Regardless of decreases, this kind of event frequently raises the stock price of a company overall.

However, individuals must familiarize themselves with the important dates regarding dividends in order to understand the effect of dividend announcement on stock values.