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Posted on  May 9, 2024 under  by Ayush Maurya

What is Dividend in Stock Market?- Types, Tax, Example

Dividends play a pivotal role in the Indian stock market, offering investors a steady income stream and serving as a testament to a company's financial health. This comprehensive guide delves into what is dividend in stock market, highlighting its significance for investors. Throughout the article, we'll demystify dividends, explore their various types, understand how they are paid out, and shed light on their taxation, all to empower Indian investors with valuable insights into dividend investing.

What is Dividend Meaning?

Dividends are the distribution of a portion of a company's earnings to its shareholders, typically in cash payments or additional shares. When a company generates profits, it can reinvest them back into the business or distribute them to its shareholders as dividends. These dividends reward shareholders who have invested in the company and represent their share of the company's profits.

Essentially, it provides investors with a tangible return on their investment beyond the potential capital appreciation of the stock.

Meet Mr. Patel, a real-life investor who enjoys free petrol for a lifetime, all thanks to his savvy investment decisions. But How? Let's delve into his inspiring story.

So, Mr. Patel spends ₹10,000 on petrol every month, which adds up to ₹120,000 a year. But instead of just paying at the pump, he sees an opportunity to invest in ONGC, a leading oil and gas production company. It's a bold move, but Mr. Patel knows investing in a company that exports oil is much wiser than just buying it.

With a hefty investment of ₹30 lakhs in ONGC, Mr. Patel becomes a shareholder in the company. And here's where the magic happens – ONGC rewards its shareholders with something called a "dividend."

ONGC's dividend yield is around 5%, which means Mr. Patel earns about ₹1.5 lakhs in dividends every year. But that's not all. As ONGC's stock price grows over time, Mr. Patel also sees his investment appreciate, adding even more value to his portfolio.
Now, with the money he gets from dividends, Mr. Patel doesn't have to worry about paying for petrol anymore. Plus, he sees his investment growing over time, making him even more financially secure.

That's Mr. Patel's story – from spending money on petrol to making money from it. By making smart choices with his money, he's saving cash and building a brighter future for himself.

Types of Dividends

Exploring the different types and methods companies use to distribute dividends to their shareholders.

1. Cash Dividends:

These are paid out to shareholders in the form of cash. For instance, if a company announces a dividend of ₹5 per share, shareholders will receive ₹5 in cash for each share they own.

2. Stock Dividends:

Also known as bonus shares, stock dividends involve the distribution of additional shares to existing shareholders instead of cash. For example, if you own 100 shares of a company and it declares a 10% stock dividend, you'll receive an additional 10 shares.

3. Property Dividends:

In this type of dividend, shareholders receive assets or property of the company instead of cash or additional shares. For instance, a company might distribute real estate or equipment to its shareholders as dividends.

4. Scrip Dividends:

Scrip dividends are similar to stock dividends, but instead of issuing additional shares, shareholders receive certificates that can be converted into shares later.

5. Liquidating Dividends:

These are paid when a company is winding up its operations and distributing its assets to shareholders. It represents a return of capital rather than a share of profits.

What is Dividend Yield?

The dividend yield is a financial ratio that indicates the annual dividend income earned per share relative to the current market price. To calculate dividend yield, divide the annual dividend per share by the current market price per share, which is expressed as a percentage. Dividend yield provides investors insight into the income potential of their investment in a particular stock.

Dividend Yield = Dividends Per Share / Price Per Share

For example, if a company pays an annual dividend of ₹5 per share and its current share price is ₹100, the dividend yield would be 5%. Dividend yield provides investors with valuable insight into the income potential of their investment and is often used to compare the attractiveness of different dividend-paying stocks.

Why Do Companies Pay Dividends?

Companies pay dividends for various reasons, including:

  1. Rewarding Shareholders: Dividends in Stock Market serve as a way for companies to reward their shareholders for their investment in the company. By distributing their profits as dividends, companies acknowledge shareholders' contribution to their success.
  2. Attracting Investors: Offering dividends can make a company's stock more attractive to investors, particularly income-seeking investors who prioritize steady income streams. The promise of regular dividend payments can help attract investors to invest in the company's stock.
  3. Demonstrating Financial Health: Consistently paying dividends can signal to investors and stakeholders that the company is financially stable and generating sustainable profits.

Impact of Dividend Payments on Shareholder Value:

When a company pays dividends, it returns a portion of its profits to shareholders, providing them with a tangible return on their investment. This can enhance shareholder value by increasing investors' total return, including capital appreciation and dividend income. Additionally, regular dividend payments can contribute to investor confidence and attract new investors, potentially increasing the company's stock price.
However, companies must balance paying dividends and retaining earnings for reinvestment in the business to ensure long-term growth and sustainability.

How Are Dividends Paid on Shares?

  1. Company Profits:
    • The company generates profits from its operations.
  2. Board Approval:
    • The company's board of directors approves a plan to distribute some of these profits to shareholders as dividends.
    • Dividends are typically paid on a per-share basis. In India, companies often distribute dividends annually or semi-annually, although some may opt for quarterly payments.
  3. Announcement:
    • The company announces the dividend details, including the payment date, the amount per share, and the ex-dividend date.
    • The ex-dividend date is crucial for investors. To be eligible to receive the dividend, investors must have purchased the stock at least two trading days before the ex-dividend date.
  4. Payment:
    • The company disburses the dividend in stock market to eligible shareholders on the specified payment date. This payment is usually made through direct deposit or credited to the investor's brokerage account.
  5. Ex-Dividend Date:
    • The ex-dividend date is significant as it determines who is entitled to receive the dividend in Stock Market.
    • Investors who own the stock before the ex-dividend date are eligible for the dividend payment, whereas those who buy the stock on or after this date will not receive the upcoming dividend.
    • However, investors who sell their shares after the ex-dividend date but before the record date are still entitled to the dividend, as they owned the shares on the ex-dividend date.

The table below highlights the most important dates of dividend in stock market:

Dividend DateExplanation
Declaration DateThe company's board of directors dividend announcement is made on this date.
Ex-Dividend DateOn this date, the dividend eligibility is slated for expiry
Record DateDetermination of eligible shareholders for dividend
Payment DateDistribution of dividends to eligible shareholders

What Are Dividend Stocks and Why Buy Them?

Dividend stocks are shares of companies that regularly distribute a portion of their earnings to shareholders in the form of dividends. These dividends are typically paid out in cash, providing investors with a steady income stream.

Benefits of Investing in Dividend-Paying Stocks:

  • Regular Income: Dividend-paying stocks offer investors a reliable source of income, making them particularly attractive for those seeking regular cash flow from their investments.
  • Potential for Growth: Many dividend-paying companies are well-established and profitable, with a track record of consistent dividend payments.
  • Lower Volatility: Dividend-paying stocks tend to be less volatile than non-dividend-paying stocks. The steady income from dividends can help cushion the impact of market fluctuations, providing investors with greater stability.
  • Inflation Hedge: Dividend payments often increase over time, which can help investors preserve their purchasing power in the face of inflation. Companies that regularly raise their dividends may outpace inflation, offering an effective hedge against rising prices.
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How Are Dividends Taxed?

Following the Finance Act 2020, dividends in India are now taxable to investors at applicable income tax slab rates. Paying tax on dividends has shifted from companies to individual investors. Previously, dividends were tax-free in the hands of investors, but with the abolition of DDT, investors are now liable to pay tax on dividend income based on their income tax slab rates.

The Finance Act 2020 introduced significant changes in the taxability of dividend income. Companies and mutual funds are no longer responsible for the Dividend Distribution Tax (DDT). Additionally, the 10% tax on dividend receipts of resident individuals, Hindu Undivided Family (HUF), and firms over Rs 10 lakh under section 115BBDA was withdrawn.
The Act also imposed a Tax Deducted at Source (TDS) on dividends paid by companies and mutual funds, with a standard rate of 10% for dividends exceeding Rs 5,000.

Certainly! Here's the optimized version with clearer calculations and additional information:

Let's take Mr. Patel as an example. On June 15, 2023, he received a dividend of Rs. 6000 from Hindustan Zinc Ltd. As per tax regulations, since his dividend income surpasses Rs. 5,000, the company must withhold a Tax Deducted at Source (TDS) of 10% on the dividend income. Therefore, the TDS amount withheld from Mr. Patel's dividend income is calculated as follows:

TDS = Dividend Income * TDS Rate
= Rs. 6000 * 0.10
= Rs. 600

Consequently, Rs. 600 will be deducted as TDS from Mr. Patel's dividend income. After deducting the TDS amount, the remaining balance that Mr. Patel will receive is calculated as follows:

Balance after TDS deduction = Dividend Income - TDS
= Rs. 6000 - Rs. 600
= Rs. 5400

Therefore, Mr. Patel will receive a balance of Rs. 5400 after the TDS deduction from his dividend income.
Furthermore, it's important to note that the dividend income received by Mr. Ravi is subject to taxation at the applicable slab rates for the financial year 2023-24 (Assessment Year 2024-25).

Is it Mandatory for a Company to Pay Dividends?

Companies are not legally obligated to pay dividends to their shareholders. Distributing dividends depends on various factors and the company's financial circumstances.

A rapidly expanding company may opt not to pay dividends instead of reinvesting profits into future growth initiatives. Conversely, a stable-growth company might pay dividends to retain shareholders and encourage them to continue investing in the company.

The choice of dividend payout approach impacts both the income stream for investors and the company's profitability.

In addition to dividends, companies may also offer stakeholders the option of a share buyback. This involves the company repurchasing its own shares to reduce the number of stocks available on the market. Share repurchases often increase metrics like earnings-per-share (EPS) and cash-flow-per-share and can improve performance measures such as return on equity.

Case Study: Mr. Patel's Successful Dividend Investing Journey

Example of dividend in share market

Mr Patel, an avid investor in the Indian stock market, decided to invest in 100 shares of Hindustan Zinc Ltd, known for its consistent dividend payouts. He purchased the shares at a price of Rs. 100 each, with a total investment of Rs. 10,000.

As a diligent investor, Mr. Patel researched the company's dividend history and financial performance before making his investment decision. He was attracted to the company's track record of regular dividend payments and stable earnings growth over the years.

True to his expectations, Hindustan Zinc Ltd declared a dividend of Rs. 2 per share for the financial year. With his 100 shares, Mr. Patel received a total dividend payout of Rs. 200.

From the company's perspective, declaring dividends is a way to share its profits with shareholders and reward them for their investment. By consistently paying dividends, the company aims to attract and retain investors, thereby enhancing shareholder value and confidence in the company's future prospects.

For Mr. Patel, receiving dividends is not just about the monetary gain but also about the sense of security and the passive income it provides. As a long-term investor, he views dividend-paying stocks as a reliable source of regular income, especially during market downturns when capital appreciation may be uncertain.

Moreover, Mr. Patel understands the importance of reinvesting dividends to compound his returns over time. By reinvesting his dividends back into the same company or other dividend-paying stocks, he can accelerate the growth of his investment portfolio and achieve his financial goals faster.

Through his journey as a dividend investor, Mr. Patel has learned valuable lessons about the power of compounding, the significance of dividend sustainability, and the importance of conducting thorough research before investing. His success story inspires aspiring dividend investors, emphasizing the benefits of patience, discipline, and prudent investment decisions.

Key Takeaways:

  1. Regular dividend payments can provide a stable source of income for investors, especially during market volatility.
  2. Investing in companies with consistent dividend payouts and strong financial performance can mitigate investment risks.
  3. Reinvesting dividends can accelerate the growth of investment portfolios through the power of compounding.
  4. Conducting thorough research and due diligence before investing in dividend-paying stocks is essential for long-term success in dividend investing.

Conclusion

Understanding dividend in stock market is essential for investors seeking to grow their wealth. With its potential for passive income and long-term growth, dividend investing offers a promising strategy for financial success. By delving into the world of dividend-paying stocks, investors can pave the way for a brighter financial future. So, whether you're just starting or looking to expand your portfolio, exploring dividends is key to unlocking your investment potential.

Frequently Asked Questions

Q1. What is a Dividend in the Share Market?

In the share market, a dividend refers to a payment made by a company to its shareholders from its profits. It's essentially a reward or return on investment for owning shares in that company.

Q2. How are Dividends Paid on Shares?

Companies typically pay out dividends on shares to their shareholders in cash or additional shares. This payment is usually made regularly, such as quarterly or annually, based on the company's profitability and dividend policy.

Q3. What is Dividend Yield in Share Market?

Dividend yield is a financial ratio that indicates the annual dividend income earned per share relative to the price per share of a stock. It is calculated by dividing the annual dividend per share by the current market price per share and expressing the result as a percentage. Dividend yield helps investors assess the income potential of a stock investment and compare the relative attractiveness of different dividend-paying stocks.

Q4. Is Dividend taxable in India?

Yes, dividend income is taxable in India. Following the abolition of the Dividend Distribution Tax (DDT) regime, dividends are now taxable to individual investors at their applicable income tax slab rates. There is no longer an exemption limit for dividend income, except for a temporary exemption of up to Rs. 5,000 for the financial year 2021-2022.

Q5. How Often Are Dividends Distributed to Shareholders?

Dividends can be disbursed monthly, quarterly, semi-annually, or annually. In certain instances, there may not be a fixed schedule for payouts, and if a company generates significant profits, it might also distribute special one-time dividends. These payments can be made in either cash or additional stock.

Ayush Maurya

Written by Ayush Maurya

Ayush is a seasoned financial markets expert with over 3years of experience. He has a passion for breaking down complex financial concepts into simple, digestible terms. Through his 50+ articles, Ayush has helped countless individuals navigate the often intimidating world of finance.

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