Discover the financial magic of dividends and understand how does it impact the stock value?
Investors who buy a company’s stock become equity shareholders of the company. When the company makes profits, shareholders are rewarded by paying dividends in a specific ratio.
Let’s explore everything about dividends in today’s article.
What is a Dividend?
A dividend is a reward paid to the shareholders for holding a share in their portfolio. Each share you hold is offered a set dividend. So, the higher the stake, the higher your dividend income. Hence, dividends are a source of income for investors apart from capital appreciation of the share.
But, not every company offers a dividend when it makes profits. A few companies believe in reinvesting the earnings for the company’s growth. Hence these stocks are classified as growth stocks. They offer higher capital appreciation over time.
It is not mandatory for a company to declare dividends. It can either choose to reinvest the profits or distribute dividends.
If a company chooses to pay dividends, it can distribute them quarterly or annually. A few companies also offer special dividends when they have made exceptional profits. This is paid on an irregular basis. If the dividend is declared between two annual general meetings, it is called the interim dividend.
How are Dividends Paid?
Dividend payments are declared in the company’s Annual General Meeting (AGM). Shareholders must take into consideration three dates.
- Declaration Date: The date on which the dividend is announced.
- Ex-Dividend Date: The date on which you must own the share to get eligible for the dividend. If you buy the share post-ex-dividend date, you won’t qualify for the dividend payment. On the other hand, if you sell the share after the ex-dividend date, you will still get the dividend.
- Payment Date: The date on which you will receive the dividend payment.
Wondering, won’t investors buy the share just before the ex-dividend date? Yes, a few people do this.
So, if many people rush to buy the share, won’t the share price rally due to increased demand? Yes, this happens often.
Dividends do not majorly impact a company’s share. But, you might see volatility in the share price due to the demand and supply of the share in the market.
Before the ex-date, the stock price may go up due to the demand for the share as investors are ready to buy the share at a premium in anticipation of getting a dividend. However, the share price may fall post the ex-dividend date due to excess supply of the share in the market.
Tax on Dividend Income
Dividend income is taxable. If you are an Indian resident and your dividend income exceeds Rs 5,000, 10% TDS is deducted. Moreover, dividend income will be added to your total income and taxed as per your tax slab.
If you are an NRI, TDS will be deducted at 20% regardless of the dividend amount, and you will have to pay a tax of a flat 20% on the dividend income.
Dividends are a great earning source for retail investors. Dividend reinvestment is also a great idea to increase your dividend income over time.
Don’t blindly invest in a stock just because it offers regular dividends. Before investing in a stock, you must understand the company’s growth prospects and invest with due diligence.
Note: This article was originally written by Teji Mandi for ET Markets.
Read the article here.