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| What is Dividend |
What is DIVIDEND
A dividend in the share market is a portion of a company's profits that is paid to its shareholders. for Example If you own shares of a company, you may receive a dividend as a reward for owning those shares. It's like a "bonus" paid by the company, usually in cash or sometimes in more shares. Dividends are typically paid regularly, like every quarter or year, but not all companies pay them. that is paid to its shareholders. If you own shares of a company, you may receive a dividend as a reward for owning those shares.
Types of dividend which is gives by company
Dividends are payments made by companies to their shareholders as a share of the company’s profits. These payments can take various forms, each with its own characteristics:
1. Cash Dividends: This is the most common type, where companies pay shareholders in cash, often via direct bank transfer or checks. Cash dividends are considered income and are taxed in the year they are paid. They are deducted from the company's retained earnings and do not appear on the income statement.
2. Stock Dividends: Instead of cash, a company gives additional shares to shareholders, usually in proportion to their existing holdings (e.g., 5 extra shares for every 100 shares owned). This doesn't change the total value of a shareholder's investment but increases the number of shares they hold. Stock dividends do not affect the company’s overall market value or the shareholder’s taxable income in the US.
3. Property Dividends: These are rare and involve paying shareholders in physical assets, like real estate, or shares from another company owned by the issuer. These are typically non-cash payments and may be subject to taxes based on the asset's value.
4. Interim Dividends: These are dividends paid before a company's final annual results are
released, usually with its interim financial statements. They give shareholders a payment before the company’s year-end financial review.
5. Other Types: Some companies distribute dividends in the form of shares from a subsidiary or financial assets like warrants. For example, a company might "spin off" a part of itself by giving shareholders shares in a new, separate company.
Payout Ratio
The payout ratio shows how much of a company’s earnings or cash flow is returned to shareholders as dividends. It’s typically calculated using earnings per share (EPS):
Payout ratio = dividends per shareearnings per share × 100
A payout ratio over 100% means the company paid more in dividends than it earned, which could signal potential risks to future payouts. However, since earnings don’t always reflect actual cash flow, a more reliable measure can be the free cash flow payout ratio:
Free cash flow payout ratio = dividends per sharefree cash flow per share × 100
A ratio above 100% here indicates the company paid out more in dividends than its available cash, raising concerns about sustainability. In short, the payout ratio helps investors assess whether a company can continue to support its dividend payments without straining its financial health.
Dividend Dates
When a company declares a dividend, there are several important dates that determine who gets paid and when:
Declaration Date: This is when the company’s board announces its intention to pay a dividend. At this point, the company records a liability for the dividend.
In-Dividend Date: The last day to buy shares "with dividend." If you buy shares on this day, you will still receive the upcoming dividend. After this, shares become ex-dividend.
Ex-Dividend Date: From this day forward, shares no longer come with the right to the dividend. If you buy shares on or after this date, you won’t receive the dividend. The stock price often drops by roughly the dividend amount on this date.
Record Date: This is the cutoff date to be officially registered as a shareholder entitled to receive the dividend. If you're not on the company's list by this date, you won't get paid.
Payment Date: The day the company sends out the dividend payments, either by cheque or direct deposit into shareholders' accounts.
These dates help ensure clarity about who is eligible for a dividend and when they’ll receive it.
Dividend Frequency
Dividend frequency refers to how often a company pays out dividends to its shareholders within a year. The most common frequencies are:- Yearly: A dividend is paid once a year.
- Semi-Annually: Dividends are paid twice a year.
- Quarterly: Dividends are paid four times a year, typically every three months.-- Monthly: Some companies pay dividends every month.
For example, in the US, most companies pay dividends quarterly, while in Japan, the UK, and Australia, dividends are often paid semi-annually. In Germany, companies typically pay
dividends just once a year.
Law and government policy on dividends
Governments regulate dividends to protect shareholders and ensure companies remain financially stable. Most countries impose taxes on both company profits and the dividends paid to shareholders, though tax treatment varies.- Australia & New Zealand: Use a dividend imputation system, where companies attach franking
credits to dividends. Shareholders can use these credits to reduce their tax liability, preventing double taxation.
- India: Companies pay a Corporate Dividend Tax on dividends, but since 2020, the Dividend Distribution Tax was abolished. Instead, dividends are taxed based on the shareholder's income tax bracket.
- United States & Canada: Tax dividends at a lower rate than ordinary income due to the corporate tax already paid, creating double taxation—once on company profits and again on the dividend payout.
- United Kingdom: Governed by the Companies Act 2006, which allows dividends only from accumulated profits. The UK also reviewed rules in 2018 to prevent companies in financial distress from paying excessive dividends.
These policies aim to balance the fair distribution of dividends with ensuring tax revenue and corporate sustainability.