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Dividend is the amount distributed to shareholders of a company. Companies use it as a mode to distribute the company’s profits to its shareholders. Mature companies with consistent earnings over the past few years pay dividends to their shareholders. Also, investor’s confidence in the company increases with regular dividend payments. Moreover, the share price of these companies tends to be higher. It is paid out per share in the form of cash or additional stock. Also, dividends are taxable in India.

dividend
dividend

What is a dividend example?

Dividends are returns distributed to shareholders from the company earnings or profits. They are a way to earn money from owned shares. In other words, it is a reward that a company pays to its shareholders.

Dividends can either be in cash or stock. Let us understand the types with an example.

Cash Dividend

Let us assume you own 1,000 shares of ABC Ltd. The company at the end of the quarter calculates its earnings and the board of directors declares dividends. ABC Ltd. announces the dividend payment of INR 5. Therefore, you receive:

1,000 (shares) x INR 5 = INR 5,000

Stock Dividend

From the above example, ABC Ltd. announces a stock dividend of 10%. In this case, every shareholder receives 10 additional shares for every 100 shares they hold or own. Therefore, for the 1,000 shares you hold, you receive 100 shares as a dividend.

Companies opt for this option in a scenario where there aren’t sufficient cash reserves to pay investors or to use the cash for reinvestments.

Why are dividends paid?

Dividends are paid out to investors by mature companies with stable earnings over several years. They do this to attract investors and increase the value of their stock. Companies also pay dividends to reassure  investors about the company’s financial health.

Companies pay dividends as investors see it as a positive sign of management’s expectations. Investors’ confidence often increases with regular dividend payments. It gives them a message about the company’s future prospects. Investors seeking regular income often opt for such companies. Hence, increasing the demand for that stock. Hence this also increases the share price of the company.

How are dividends paid?

Dividends are payable to the investors in the form of cash or additional stock. Investors receive the amount in their bank account. Also, they are payable in the form of stock.

Dividend payments are made to shareholders holding shares on a particular day. There are a few dates that are important for dividend payments.

  • Announcement date: Companies announce dividend payments on this date.
  • Record date: Date on which the company makes a list of shareholders who are eligible to receive the dividend.
  • Ex-dividend date: Date on which the dividend eligibility date expires. All investors buying the share on that day or after this day will not qualify for dividend payments.
  • Payment date: Date on which the dividend is credited to the shareholder’s accounts.

Are dividends taxed as income?

Yes, dividends are taxable as income. This income is taxable as per the applicable income tax slab rate of the shareholder. Also, the they are subject to TDS of 7.5% in case the dividend receivable is greater than INR 5,000. The rate has been cut from 10% to 7.5%, due to the pandemic outbreak and the new rate is only till March 2021. For non-individual shareholders (Company, Firm, HUF, etc.), this income is subject to TDS without any limit. 

What is a good dividend yield?

A good dividend yield is anywhere between 4% to 6%. It depends on market conditions and interest rates. However, the yield alone cannot be a good indicator to buy a company’s share.

For example, an investor holds shares of company XYZ Ltd. XYZ Ltd., share price falls by 20% in a year, and the company announces a 5% dividend. The fall in the price of the share is much higher in comparison to the dividend announced. Therefore, it doesn’t matter how much the dividend is or whether it is good.

Also, a high dividend yield may indicate that it is not safe and that the rate might be cut in the future. Hence, it is always advisable to proceed with cautions when investing for dividend income.

Published on August 4, 2020