Do you know, you can make money not only by buying, investing, or selling shares in the stock market for a long time, but you can also earn a lot of money through Dividends. Want to know how? So do read the full article. In this article, it has been told to you that what is Dividend in the stock market? How to get a dividend? Types of Dividend., Dividend Yield, and other information related to benefits of Dividend.
Meaning of Dividend
The literal meaning of Dividend is “Profit Sharing”, that is, a part of the profit. So let’s know what is Dividend in the stock market is and complete information related to it in simple language.
What is Dividend in the share market?
When a company, after paying all its liabilities and taxes, gives a profit share for every share to the shareholder, this profit is known as the dividend.
That means the company shares its profit with the shareholder.
How much dividend a shareholder will get can be found by multiplying the dividend amount by the shares held by him.
Let us understand this with an example — suppose Ram has 500 shares of ITC. If ITC decides to pay a dividend of $5 per share, Ram will receive a dividend of $500 X 5 = $2500.
This is the real way, in which along with buying and selling shares in the stock market, investors also earn money through Dividends.
So it becomes very important for new investors to know what is Dividend?
How Dividend is Paid
The dividend is determined based on the value per share.
After the declaration of the dividend, the company pays it on a specific date.
This date is called the due date.
When the company makes a profit, it saves its profit and decides to distribute it among its shareholders.
After the approval of the Board of Directors of the company, it issues the shares for payment on a payment date, due date, and on the record date.
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How Many Types Of Dividend Are There
There are six types of dividends, which are as follows –
#1 Cash dividend
Most companies pay this type of dividend.
It is a cash payment that is sent directly from the company to the shareholder’s account.
Payment is usually done electronically, but sometimes payment can be made through cheque as well.
#2 Stock dividend
Stock dividends are paid out by issuing new shares to shareholders.
People investing in common stocks can opt for stock dividend payout.
This dividend is considered better than the cash dividend.
The company gives an option to the shareholders to convert the stock dividend into cash as per their wishes.
#3 Asset dividend
Companies can also make non-monetary payments in the form of dividends to shareholders in the form of physical assets, immovable property, and others.
#4 Scrip dividend
When the company does not have a sufficient amount to issue the dividend, the company can issue a scrip dividend, a kind of promise which guarantees to pay at some future date.
#5 Liquidating dividend
When a company is closing its business, it pays its shareholders a liquidating dividend.
This is the final payment made by that company to the shareholders, this payment is made based on the number of shares.
#6 Special dividend
When a company pays a dividend other than its dividend payment policy, then it is called a special dividend.
This special dividend is paid when the company makes more profit.
This is known as an additional dividend.
This dividend is generally higher than the normal dividend.
Types of Dividend Based On Classes
There are two types of Dividend in the Stock Market based on classification and according to the Dividend on Financial Year Result and Quarterly Result–
#1 Interim Dividend:
When a company decides to pay dividends to its investors with its quarterly result or before the end of the financial year, then it is called an Interim Dividend.
#2 Final Dividend:
Unlike an interim dividend, when a company decides to pay a dividend after the final result at the end of the financial year, it is called Final Dividend.
How to Calculate Dividend? Dividend Calculation
You have come to know what is Dividend, what is the type of dividend, now let us know how to calculate dividends.
The dividend is always given only on the face value of the company share, it does not relate with the share price in any way.
The way face value($1) is written on the currencies but the actual value of the currency changes with GDP or Inflation.
Similarly, the face value is called the fixed price of a share which never changes. Let us now know how Dividend Calculation is done –
Suppose the share price of company A is $280 and its face value is $10.
The company decided to pay a 200% dividend on the face value of the company that year.
Now according to the face value of $10 per share, the shareholder will be given a dividend of 200% i.e. $20 per share.
Note that here the market share price of the company has no relation with dividends.
Do all companies give Dividends?
Not all the companies of the stock market need to give Dividends.
Dividends are considered to be given only by those companies which have made more profit in their business in the current year as compared to the previous year.
The decision to decide whether or not to give Dividends by the companies is taken by the Board of Directors of that company after deliberating in a fixed meeting at the Annual General Meeting (AGM).
It is believed that as many big companies as they are, they pay dividends and small companies do not pay dividends.
This idea is completely wrong because it is not necessary, sometimes small companies give dividends to the investors instead of increasing their business so that the confidence in the mind of the investors can increase, which can also increase the investment in the future.
Big companies do not give Dividends to make their business bigger instead of giving other dividends.
There are some companies in the stock market which are known for giving good dividends irrespective of their profits.
In Which Account Does Dividend Money Come?
The dividend comes in the same linked bank account through which you send money to buy or sell shares in your Trading Demat Account.
Suppose you have opened your Demat Trading Account in Zerodha and invest in the stock market through it.
You will get the dividend money in that bank account linked with Zerodha.
What is Dividend Yield?
The ratio by which the ability of a company’s stock to pay dividends is measured is called Dividend Yield.
With Dividend Yield, the investor gets to know how much percentage the investor will get as a dividend on the investment made at the current market value of the stock.
Let us understand from the above example –
Suppose the share price of company A is $280 and its face value is $10.
Now the company has decided to give a 200% Dividend.
The dividend to be received by the investor on the face value of $10 will be $20 (200% off 10 )
When we talk about Dividend Yield,
Dividend Yield = (Dividend Value /Share Market Value ) X 100
DY = (20/280) X 100 = 7.14%
Important date related to Dividend
When the company declares a dividend for its investors, that dividend is not transferred to their accounts immediately, but there are some steps in it.
Let us know about some important dates and steps related to Dividend –
Dividend Declaration date:
On this date, the company declares to its shareholders and in the news that it wants to give some part of the profit i.e. dividend to its investors.
Last Cum-dividend date/Ex-Dividend date:
As the name suggests, this is the date after which if you buy the shares of the company, then you will not get any benefit from the dividend declared at that time.
Record date:
On this day, the dividend-paying company checks its record book to find out which people have shares of their company and which people have bought shares after the ex-dividend date.
Dividend Payout Date:
This is the date on which the Dividend is transferred to the investors of the company in their accounts.
Advantages of Dividend | Benefits of Dividend :
Some of the main advantages of dividends are as follows –
Dividend can become a good source of passive income for you if you invest in good companies of the stock market.
No tax is levied on any profit you make in the form of Dividends.
The biggest advantage of Dividend is that the amount received by it keeps on increasing with every year because the profit of the company keeps on increasing and Dividend also keeps on increasing.
BottomLine:- With The help of this article I have tried to explain “What is Dividend”, How Dividend is paid, how to calculate dividend, what is the dividend yield, what are the advantages of dividend, what are the types of dividend and many more so that you can easily understand the meaning of dividend.
