As an investor, you can earn through capital appreciation and dividends. Capital appreciation happens when the price of the stock you invested goes up. On the other hand, a dividend is a reward you get for holding the company’s shares.
What is Dividend?
A company shares its profits with its shareholders in the form of dividends. Also, dividends can be in cash or shares and is payable every quarter or at the end of the financial year. The board of directors decide the dividend rate, but shareholders approve it.
Dividends are payable from the profits after paying all the creditors of the company. A company is not obligated to pay a dividend, it only pays dividends when it has no immediate growth plans that require funds.
Companies that are in their early stages or have a high potential to grow do not pay dividends. In contrast, established companies pay regular dividends as they do not have huge capital expenditures in the near term and so they reward their shareholders.
Types of Dividend
A company pays dividends in different forms to its shareholders. Following are five types of dividends.
This is the most common and popular type of dividend. The company uses its cash reserves to pay dividends to its shareholders. Also, the dividend is directly credited to the shareholder’s bank account on the payment date.
When a company issues additional shares to its shareholders without consideration, it is a stock dividend. If the company is issuing less than 25% of outstanding shares, it is a stock dividend or a stock split. Thus, the shareholders receive a credit of shares directly into their demat account.
When a company issues promissory notes to its shareholders with a promise to pay a cash dividend at a future date, then it is a scrip dividend. These promissory notes are transferable and may or may not be interest-bearing.
The company pays its shareholders dividends in the form of inventories or other assets when it doesn’t have enough cash to pay dividends.
It is the dividend paid when the company is liquidating itself. It is the amount the shareholders initially contributed to the company.
Dividend per share (DPS) is the total dividend that a company distributes on each outstanding share. In other words, it tells how much each share of the company has earned. A rising dividend per share indicates the company has growing profits which it is willing to share with its shareholders.
The dividend per share is calculated by dividing the total dividend by the number of outstanding shares.
Dividend Per Share Formula
The formula for the dividend per share is as follows.
DPS = Total dividend paid/ Total outstanding shares
Let’s understand this with the help of an example. Suppose a company’s annual dividend payment is Rs 10 lakhs, and it has 1 lakh outstanding shares. The following is the way to calculate dividend per share using the above formula –
DPS = 1,000,000/100,000
DPS = Rs 10
This means the company has paid Rs 10 on each share.
Earnings per share (EPS) is the measure of a company’s profitability. It is the profit earned for each outstanding share. It is calculated by dividing the net profit by the total outstanding shares. A rising EPS indicates the company’s profits are growing, which signifies its financial strength and stability. EPS doesn’t tell how much cash the company distributes to the shareholders. However, it is the basis of the dividend payment that the company makes to the shareholders.
Dividend per share (DPS) is the part of earnings that is distributed to the shareholders. The board determines it based on the EPS. It is calculated by dividing the total dividend by outstanding shares. A rising DPS indicates the company’s strong financial performance and that the company is willing to distribute the profits to its shareholders.
Frequently Asked Questions
A dividend is a reward the investors receive from the company. Investors usually invest in dividend stocks to earn an additional source of income. Moreover, in a volatile market condition, dividend income provides a sense of stability to the portfolio.
A rising dividend per share indicates the company’s financial strength. Dividends can tell how profitable the company is in the past and how stable are its current financials.
Usually, established companies pay a high dividend to reward their shareholders. Also, companies with no immediate growth plans or low debt obligations usually pay high dividends.
Dividends are taxable in India. The dividend income falls under the head ‘Income from Other Sources’ and is taxable at the investor’s income tax slab rate. Moreover, if the dividend income exceeds Rs 5,000, then the company will deduct a TDS (tax deducted at source) of 10% before paying the dividend.