A dividend is a form of payment made for the distribution of a company’s profit to its shareholders. The company’s board of directors have authority to decide and manage dividends. They decide the frequency, the amount of dividend to be paid and the amount to be kept aside for the expansion of the company.
A dividend is basically a reward given by the company to its shareholders for investing their money into the company. A company may not pay their whole profit as dividend. They may keep aside a portion of the profit for the expansion of the company and it is known as retained earnings. The company may also decide not to pay any dividend if there is no sufficient profit to do so. There are no legal requirements which say that the company must pay dividends to its shareholders.
The board of directors decide the frequency of paying out the dividends. They may make dividend payments on a monthly, quarterly or annual basis. A dividend is given as a fixed amount per share and the shareholders receive it according to their shareholding in the company. Dividends provide a stable income for shareholders which will raise the morale among shareholders which would eventually result in higher share prices of the company. Some shareholders prefer to receive dividends more frequently since it provides them with stable income. While other shareholders do not wish to receive it frequently and believe that it should be retained in the company which would help in the growth of the company and would benefit the shareholders with the increase in share prices of the company. Some of the companies which pay high dividends are Vedanta, Coal India Ltd, REC Ltd, Indian Oil Corporation Ltd etc.
Dividend yield is actually the dividend expressed in percentage of the current share price. It is the ratio of dividend that is paid per share to the current market price.
The formula for dividend yield is: Dividend Yield= Dividend per share/ Market price of share*100
Let’s look at some of the important dates associated with dividend payments.
The first date is the announcement date. The company’s board of directors announce the dividend payouts on the announcement date which then must be approved by the shareholders.
The second date is the Ex dividend date on which the eligibility of the dividends expires. A person has to hold the share on the Ex dividend date to be eligible to receive dividends.
The third date is the record date on which the company determines the shareholders who are eligible to receive dividends.
The final date is the payment date on which the company pays the dividend to shareholders through banks and this gets credited to the bank account of the shareholders.
The share prices get impacted by the declaration of dividends by companies. The share prices rise on the day the dividends are declared by the amount of the dividend amount and it decreases by the similar amount on the Ex dividend date.
For example, if a share is being traded at Rs.200 and the company declares a dividend of Rs.5 per share on the announcement date. Then the share prices would increase by Rs.5 to be Rs.205. Similarly, on the Ex dividend date, the share prices would decrease by Rs.5.