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What Is Dividend? Why Are They So Important?

“As a shareholder, I am sorely, sorely disappointed. I don’t know what you will do with the cash,” said Rakesh Jhunjhunwala, one of the most successful investors, as he slammed Titan’s management for the previous fiscal year’s (FY21) dividend payout. Titan reported its March quarter and full-year earnings and a final dividend of ₹4 per share. The dividend payout was 40% of net profits.

When you receive a notification of getting entitled to some dividend, it will often make you feel you earned some bonus. And if you have stayed invested in company stock for a more extended period, you will receive good dividends that can be in lakhs.

This article focuses on explaining the dividends, calculating dividend yield, and why dividends are so significant for us. 

What is a Dividend?

A dividend is an incentive that a company pays to its shareholders. There are various ways of paying dividends, including cash, shares, etc. The firm’s board of directors decides the dividend declaration date and payout percentage. But one must remember that paying dividends is not mandatory for any company. 

When an organization declares a dividend, it also establishes a record date, after which registered shareholders (as of that day) are entitled to receive dividend payments. 

Once the company pays its obligations to its creditors and other payables, it may distribute a portion of its remaining profits to its shareholders as dividends. When a company is short on cash or needs cash for reinvestment, it may forego dividend payments.

What is an Interim Dividend?

A company pays interim dividends before its annual general meeting and the publishing of final financial accounts. This announced dividend distribution is in conjunction with the company’s interim financial report, and the payment can be quarterly or semi-annually. 

Although the interim dividend payment necessitates shareholders’ approval, the company’s board of directors declares it.

The final dividend may be higher than the interim dividend when a company pays interim and final dividends in the same fiscal year. Also, suppose the yearly earnings are lower than projected. In that case, the board of directors may choose to keep the interim dividend at a lower rate to avoid limiting the company’s capacity to function. 

Do Indian Companies Pay Dividends?

Indian companies pay dividends to the shareholders, and mostly well-established companies declare dividends. Investing in dividend stocks in India can be a fruitful way for you to create income or grow wealth by reinvesting dividend payments. 

It is important to understand that not all firms in an industry, or industry in total, may offer dividends. This is because of the dynamic business environment and capital requirements for expansion and market share retention.

Dividend investing is a technique that provides you with two potential sources of profit: one is predictable income from periodical dividend payments, and the other is capital gain over time. 

What are Dividend Yield Stocks?

A dividend yield is a percentage that states how much your company pays as dividends in terms of the stock price. For example, a dividend yield of 10% means you earn 10% returns on your stock investments through dividends. 

The dividend yield measures the proportion of cash dividends paid to shareholders relative to the market value per share. An organization with a high dividend yield pays a substantial percentage of its profits in dividends. 

Dividend yield quantifies the earnings generated by total dividends paid to investors who invest in a company. Dividends are payments to a company’s shareholders, and companies pay out a portion of their income as dividends while holding the rest to reinvest in the firm.

Dividend Yield Calculation

Dividend Yield Calculation

Example

A company whose market capitalization is ₹200 declares a dividend of ₹20 per share. The stock’s dividend yield is 20/200*100 = 20%.

Why are Dividends Important?

Dividends provide a consistent source of income for many investors, and they also have a specific place in an investor’s portfolio. Dividends can effectively combat the adverse effects of inflation, market volatility, and other factors. 

Passive Income

Dividends are consistent and dependable income that investors get for the shares they hold in a company. 

Although firms are not required to pay out dividends to shareholders, significant corporations routinely distribute dividends to their shareholders, and investors receive a consistent stream of income with no risk to their portfolios.

Less Risky

Even if there is a rapid market crash or a drop in the value of a certain event, high-dividend stocks do not lose value. 

The best thing about dividends mainly is that they regain their value amid volatile market fluctuations, making them a reliable option for capital protection for risk investors. When you introduce these equities to a portfolio, they effectively diversify the risk potential. 

Reinvestment

When investors receive dividend payments, they can use the money for personal expenses or reinvest it in the same stock. Dividends can assist investors in generating consistent profits on their investments through dividend compounding, a process known as ‘dividend capitalisation.’

Double Benefits For Investors

Dividend stocks may not have a more substantial potential for growth than other growth companies, but they do have the potential for value appreciation. A large portion of well-established corporations or market participants pay out dividends and regularly increase dividend payouts, depending upon the macro (government regulations, economic trends) and microenvironment (company performance and market share, expansion plans). 

Investing in dividend-paying corporations can provide partial returns on investments superior to non-profitable equity purchases, particularly in turbulent markets. For example, an investor can invest in a stock with a high dividend yield and reap the rewards over the years.

Less Volatile

When investors suffer losses due to a stock price decline, dividends offset the loss and limit the risk. Even though a bear market usually is unfavourable to all industries and investment vehicles, dividend-paying stocks outperform their peers.

Beats Inflation

Inflation can consume your hard-earned money, but you can minimize that by investing in dividend stocks and exceptionally high dividend growth equities. Most dividend-paying investments outperform inflation, providing the investor with a small profit to spend on other investments.

Conclusion

Although investing in dividend stocks is safe; you need to invest a significant amount of time researching the investment process. Dividend-paying equities offer the reinvestment feature, which is an added advantage. 

Nevertheless, before incorporating dividend investing into an investment portfolio strategy, an investor should become acquainted with the benefits and drawbacks of dividend investing. At WealthDesk, we offer you readymade WealthBaskets consisting of stocks or ETFs reflecting an investment strategy or theme designed explicitly by the SEBI-approved investment professionals and make your investment journey hassle-free.

FAQs

How do dividends influence investors?

The payment of a dividend motivates investors to buy stocks. Investors are ready to pay a premium when they know they will receive a dividend if they purchase the shares before the ex-dividend date, and that often causes a stock’s price to rise in the days running up to the ex-dividend date.

How does the Indian investor receive dividends?

The organization will declare dividends and you will receive dividends based on the number of shares you hold on the specified record date, directly in your bank account.

Why do companies increase dividends?

Companies increase dividends to share profits with shareholders in case companies have enough funds to continue with planned expansion and gain the trust of their shareholders.

What is a Good Dividend Cover?

A ratio of 2.0 is desirable since it indicates that a company’s earnings could cover its current dividend payout twice over, signaling that it is generating enough cash to finance dividends now and in the future.

What Is Dividend? Why Are They So Important?

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What Is Dividend? Why Are They So Important?

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