Unlock the significance of dividends in the share market, learn about their types and how they are paid out, and discover key factors to evaluate before diving into dividend stocks in India.
Dividends are payments made by a corporation to its shareholders, usually cash or stock. These payments represent a portion of the company’s profits, and they’re distributed among the shareholders to reward them for their investment. Dividends can be paid regularly, such as quarterly or annually, or they can be paid as a one-time special dividend.
Types of Dividends
Dividends are profit shares distributed by companies to their shareholders. While a part of the profit is retained for reinvestment, the rest is given out as dividends. They come in various forms:
- Interim Dividends: Announced quarterly or half-yearly, these can be modified after declaration.
- Final Dividends: Annual dividends based on a company’s annual performance; once announced, they are final.
Other ways companies distribute dividends:
- Stock Dividends: Bonus shares provided by the company.
- Cash Dividends: A fixed cash amount per share.
- Property Dividends: Shares of subsidiary companies.
- Scrip Dividends: Promissory notes promising future dividend payments.
Why buy Dividend Stocks?
Dividend yield stocks are valuable long-term investments. They not only provide steady income over time but also maintain demand regardless of market fluctuations.
Stocks with dividends can offer a regular and growing source of income.
Dividends on typical stocks aren’t always sure. Yet, they are often given by reputed companies in India that don’t have to invest much back into their operations anymore.
A company giving out dividends is usually seen as a sign of its financial stability. When a company starts or increases its dividend, it’s generally expected to continue, even in challenging market conditions. If investors feel that a company might decrease its dividend, they might value its stock less, leading to a decrease in its share price.
Studies have shown that during times when prices rise (inflation), stocks that consistently increase their dividends usually perform better than the overall market.
In India, several well-respected companies have a history of consistently offering and even increasing dividends. Companies like Reliance, TCS, HDFC, and Infosys are known to provide dividends. Some companies have been consistent with their dividends for many years. In contrast, companies in sectors like IT or startups might not offer dividends, as they tend to reinvest their earnings for growth.
For investors not keen on picking individual dividend-paying stocks, they can consider dividend mutual funds or ETFs (Exchange-Traded Funds) available in India. These funds pool together various dividend stocks, making it easier for investors. They also distribute the collected dividends to the investors from these stocks.
How are Dividends Paid out?
Indian companies follow a structured process:
- Dividend Declaration Date: The date the board decides on the dividend.
- Record Date: Determines eligible shareholders for the dividend.
- Ex-dividend Date: Purchase before this date to qualify for dividends.
- Payment Date: The actual date of dividend distribution.
Taxation for Dividends
Changes from Finance Act 2020:
- The Dividend Distribution Tax (DDT) was removed.
- Previously available exemptions under section 10(34) of the Income Tax Act, 1961 (IT Act) were withdrawn. This means that dividends will now be taxed when received by shareholders.
Tax Deduction at Source (TDS) for Companies:
- Companies that give out dividends must now deduct a 10% tax (TDS) before paying their resident shareholders.
- Exception: If the total dividend given (or expected to be given) in a financial year is less than ₹ 5,000 and the payment mode isn’t cash, the company doesn’t need to deduct this tax.
TDS for Mutual Funds & Specified Companies:
As per section 194K, a 10% TDS must be deducted before paying any income related to mutual fund units or specific company units to a resident.
Similar to the above point, no TDS needs to be deducted if the total income given (or expected to be given) in a financial year is under ₹5,000 or if the income type is capital gains.
Steps to Evaluate Dividends
- Dividend Yield Ratio Interpretation: A high ratio can indicate limited reinvestment.
- Dividend Analysis: Use dividend ratios for understanding payout situations only.
- Absolute Dividend Numbers: Look beyond high dividend yields; they may not always translate to good investments.
How Do Indian Companies Pay Dividends?
The procedure involves 4 steps, very straightforward processes/ dates.
Dividend Declaration Date:
This is the day when a company’s board formally decides to distribute a portion of its profits to its shareholders. It can pertain to both interim (quarterly or half-yearly) and final (annual) dividends. For record-keeping and financial accounting, this date is labeled as the ‘dividend declaration date’.
Record Date:
Given the ever-changing landscape of stock trading, shareholders of a company are in constant flux. Thus, the ‘record date’ serves as a crucial cut-off. It’s on this specific date that the company checks its records to determine which current shareholders are qualified to receive the upcoming dividend. Only those listed as shareholders on this day are deemed eligible.
Ex-dividend Date:
This date has particular significance for those contemplating buying or selling a company’s stock. If you buy shares on or before the ex-dividend date, you’re in line to receive the declared dividend. However, if you buy shares after this date, you won’t be eligible for the current round of dividends. Conversely, if you sell your shares on or after the ex-dividend date, you will still receive the dividend.
Payment Date:
As straightforward as it sounds, the payment date is when the dividends are actually transferred to the shareholders. It’s the culmination of the dividend process. This date is not arbitrarily chosen; it is set in stone on the dividend declaration date, ensuring transparency and clarity for all shareholders.
Factors Depending on Which Dividends Are Announced in India
- Company’s Profit: Higher profits can lead to more dividends.
- Dividend Payout Tendency: A company’s historical payouts can indicate future trends.
- Industry Dividend Trends: Companies often mirror competitors.
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FAQs on Dividends
What is a dividend in the share market?
Dividends are portions of a company's profits shared with its shareholders.
How to calculate dividends?
Dividends are calculated based on a company's profit and its dividend payout ratio.
Is dividend taxable in India?
Yes, dividends are subject to taxation in India, depending on specific conditions.
How do I receive the dividend payments?
Dividends are directly credited to the shareholder's registered bank account on the payment date.
How does a share price react to dividend payouts?
Share prices of dividend stocks might rise upon dividend announcements but may fluctuate post the ex-dividend date.
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