One of the many ways of earning consistent returns through stock markets is through dividends declared by the companies. There are dedicated funds that focus on investing only in high dividend-paying stocks thereby making them a good investment opportunity for risk-averse investors or investors looking for stable returns from the stock markets. But what is the basic meaning of dividend and how is it calculated? Given here are the answers to these questions.
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Dividends are the share in the net profit of the company that is ultimately distributed to the shareholders of the company. The company sets a cut-off date to record the shareholders who will be eligible for the dividends declared by the company. At such date, all the shareholders as per the records of the company will receive dividends as per the shares held by them.
Dividend per share (DPS) is a measure of how much money a company pays to its shareholders for each share they own. It is obtained by dividing the total dividends paid by the number of shares outstanding. This metric is crucial for investors as it provides an idea of the income they can expect from their investments. Companies that pay high dividends per share are usually preferred by investors who seek a regular source of income, while those that pay low or no dividends may be more appealing to investors who prioritize reinvestment of profits for growth.
The formula to calculate dividend per share is:
Dividend per share = Total dividends paid / Number of shares outstanding
Let’s consider an example to understand this concept better. Consider Company X has made a profit of Rs. 10,00,00,000 in a year, and it has decided to distribute 30% of its profit as dividends to its shareholders. The company has 1,00,00,000 shares outstanding.
To calculate the dividend per share, the first step is to calculate the total dividend available for distribution and then the dividend available per share
- Calculating the total amount of dividends declared –
- Total dividends = Profit x Percentage of dividends
- Total dividends = Rs. 10,00,00,000 x 30%
- Total dividends = Rs. 3,00,00,000
- Calculating the dividend per share –
- Dividend per share = Total dividends / Number of shares outstanding
- Dividend per share = Rs. 3,00,00,000 / 1,00,00,000
- Dividend per share = Rs. 3
So, in this scenario, the dividend per share would be Rs. 3. This means that for every share a shareholder owns in the company, they will receive Rs. 3 as a dividend payment.
What are the types of dividends?
There are various types of dividends that can be declared by companies. Some of the popular forms of dividends are discussed hereunder.
- Cash dividends
A cash dividend is a payment made by a company to its shareholders in the form of cash. It is usually paid out quarterly, semi-annually, or annually, and the amount of cash dividend per share is determined by the company’s board of directors. The payment of cash dividends is usually a sign that a company is profitable and has enough cash on hand to distribute to its shareholders. Cash dividends can be received by shareholders in the form of a check or direct deposit to their brokerage account.
- Stock dividends
A stock dividend is a payment made by a company to its shareholders in the form of additional shares of its stock. For example, if a company declares a 5% stock dividend, a shareholder who owns 100 shares of the company’s stock would receive an additional 5 shares. Stock dividends are typically issued in small percentages, such as 2-5% of the total shares outstanding. Stock dividends are often seen as a way for companies to reward their shareholders without having to pay out cash.
- Property dividends
A property dividend is a payment made by a company to its shareholders in the form of assets or products that the company produces. For example, if a company produces a new product and decides to distribute it to its shareholders as a dividend, this would be a property dividend. Property dividends are relatively rare, and they are typically only used when a company has excess assets or inventory that it wants to distribute to its shareholders.
- Special dividends
A special dividend is a payment made by a company to its shareholders in addition to its regular dividends. Special dividends are usually paid out when a company has extra cash on hand, such as after a particularly profitable year or the sale of a major asset. Special dividends are often larger than regular dividends and can be a one-time payment or recurring payment. Special dividends are seen as a way for companies to reward their shareholders and boost their stock prices.
Dividend per share is a piece of important information not only for the shareholders but also for others. The importance of calculating dividend per share for different entities are mentioned below.
- Importance for Shareholders
Shareholders are the owners of a company, and they invest in the company’s stock with the expectation of receiving returns on their investment. Calculating the dividend per share is important for shareholders because it helps them understand how much income they can expect to receive from their investment. This information is important for planning and budgeting purposes, and it can also help shareholders decide whether to hold onto their shares or sell them. Dividends also work as a passive source of income for many shareholders.
- Importance for Investors
Investors, like shareholders, are interested in receiving a return on their investment. Calculating the dividend per share is important for investors because it can be used as a measure of a company’s financial health. Companies that pay high dividends per share are generally considered to be more stable and profitable, while companies that pay low dividends or no dividends may be riskier investments.
- Importance for the Company
Companies also benefit from calculating the dividend per share because it helps them manage their finances and maintain shareholder confidence. By paying dividends, companies can reward their shareholders and attract new investors. However, companies need to balance dividend payments with their other financial obligations, such as debt payments and reinvesting profits into the business. By calculating the dividend per share, companies can determine how much money they can afford to distribute to shareholders while still meeting their financial obligations and investing in the future growth of the business.
Apart from these entities, the calculation of the dividend per share is also important for lenders and creditors as it indicates the ability to make interest and principal payments on the debt as well as provides insight into the financial health of the company.
Conclusion
Dividends are one of the most important components in the financial statements of a company and are indicated in the profit and loss statement. It is important to understand the concept of dividend per share as it is the value available to the shareholders on a more or less regular basis for their investment in the company. Calculating the dividend per share enables the investors to make an informed decision about whether to invest in a company or not and ensure that such investment meets their investment goals and returns expectations thereby creating a successful portfolio.
FAQs
Dividends are taxed in the hands of the shareholders at their applicable slab rates
The declaration of dividends by a company is not obligatory every year. The decision to distribute profits in the form of dividends is entirely at the discretion of the company’s board of directors. They may choose to pay dividends to shareholders or reinvest the profits in the business. The decision of whether or not to declare dividends depends on various factors that the board of directors considers, such as the company’s financial position, growth opportunities, and shareholder expectations.
There is no limit on the number of times a company can declare dividends in India. The Companies Act, 2013, which governs the regulation of companies in India, does not specify a minimum or maximum number of times that a company can declare dividends. However, in practice, most companies in India pay dividends once or twice a year. Some companies may choose to pay interim dividends during the year and a final dividend at the end of the financial year, while others may pay a single annual dividend. The frequency and amount of dividends declared by a company depend on various factors, including the company’s financial performance and the needs and expectations of its shareholders.
Yes investors also get dividends from their investment in equity mutual funds, however, dividend payments are subject to a deduction of TDS if the dividend payment is over Rs. 5,000 during a financial year.
