Dividends in Stock Markets - explained

Share |

StockInvestingTips learning series Hope you all are immensely benefitted from our tutorial series(We want to make it a once-a-week feature[hopefully]) which is targeted for amateur investors or ones who want to learn more about basics of stock market investing. This post is dedicated to the basics of Dividends in stock market and would also explain all that an investor should know about dividend yield. Before starting the first and most important thing to know about is What is Dividend?

Dividend is a method/tool by which the owners of company share the profits with the stockholders of the company. Stock holders are people who have invested in that company and are partial owners of the company. Amount of dividend to be distributed is decided by the board of directors of a company and before giving out dividend the company might keep aside certain amount of profits needed for expansion or Research or re-investing. It is purely on discretion of the board of directors whether they want to distribute dividend or not.

Dividend is often calculated in unit called Dividend Rate. which is quoted in INR each share receives. Dividend Rate might also be quoted in terms of a percent of the current market price, often called as dividend yield. Dividend payments must be approved by the shareholders and may be structured as a one-time special dividend, or as an ongoing cash flow to owners and investors. Dividends are mainly given by blue-chip companies as they have ample cash surplus and strong customer base and reputation. A newly listed company might not give dividend as it needs money for expansion and acquisitions. However ones such company reaches a mature level and becomes stable, then it might offer dividends.

A company which decides to pay-out dividend may have different principles and methods for deciding the amount of dividend per share it wants to distribute. Some of the methods which are quite common with the board of directors are as follows:

1. Stable dividend policy: Even if corporate earnings are in flux, stable dividend policy focuses on maintaining a steady dividend payout.
2. Residual dividend model: Dividends are based on earnings less funds the firm retains to finance the equity portion of its capital budget and any residual profits are then paid out to shareholders.
3. Constant payout ratio: A company pays out a specific percentage of its earnings each year as dividends, and the amount of those dividends therefore vary directly with earnings.
4. Target payout ratio: A stable dividend policy could target a long-run dividend-to-earnings ratio. The goal is to pay a stated percentage of earnings, but the share payout is given in a nominal dollar amount that adjusts to its target at the earnings baseline changes.


We'll end this post here as it has lots of concepts and methods for understanding the way dividends work and how companies decide for dividend payout. More data would make this even more heavier. You can subscribe through email to get stock investing tutorials directly in email or can press LIKE on top of the post to get updates from our facebook page.
Be tuned for our next post on Dividend yield.
HAPPY TRADING!!

Dividends in Stock markets - Explained

Share |

In this post I would explain about Stock dividends, which many people/newbies may not know about. Dividends is actually one way of sharing profits with the shareholders by the company management.

Generally for a company which is making profits there are four major ways to use the profit money by the management.

4 ways in which Company can use profit money:

1.Reinvest in company(for expansion/diversification
2.New Acquisitions
3.Sharing profits by giving dividends
4.Paying the debt incurred before

The 3rd way of sharing profits with shareholders is done by giving dividends/share. It is generally done through DD or cheque posted to the address of shareholders, stock dividends help greatly in increasing the investor confidence in the company. Dividends does not come with a date and neither are guranteed, but these are what every investor would like as paybacks on investment are always welcome. Dividends also add to profits from stocks as these are in addition to the capital gain in stock price over time. Many Cooperatives, allocate dividends according to shareholders activity, so their dividends are often considered to be a pre-tax expense.

Types of Dividends

At high level we can say there are 4 types as below:

1.Cash dividends: These dividends are most common and are paid per share, It is a form of investment income and are usually taxable to receiptants for same fiscal year.
2.Property dividends: Property dividends are given in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation. They are relatively rare and most frequently are securities of other companies owned by the issuer, however they can take other forms, such as products and services.
3.Stock dividendsStock dividends are paid in form of additional shares of the same company or any of the subsidary company, The proportion of stock dividend is fixed by management of the company ie 5 shares per hundred etc.
4.Interim dividends:Interim dividend is distribute by the company before it's annual report is finalized, these form the interim financial statements of the corporation