We know that to make money in the stock market we must buy a stock at a lower price and sell at a higher price. What if we told you there was another way too? Let us talk about dividends, a timely monetary reward (just like interest on a fixed deposit) for staying invested in a particular company.
If you spoke to your father or grandfather about investing in shares, you would hear them say, “Invest in dividend-paying companies, they are often good companies” What is this dividend really?
In simple terms, a dividend is a reward the company offers the shareholders (investors who have invested in shares) for staying invested in its capital. It is a way through which a company shares it profits with the shareholders.
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When is the dividend usually declared?
Dividends are of two types. One is interim dividend, and the other is final dividend. Interim dividends can be declared at any time during the year and as many times in the year by the company. The final dividend is only declared once, and that is usually before the annual general meeting of the company. Generally, one can expect dividend declaration news in the months of January to March and June to September. If an interim dividend has been declared, then declaring a final dividend is a must. At times the company may go ahead and declare the interim dividend itself as the final dividend. This was done by many companies in March 2020 when the pandemic hit the world.
How do I know when a company will declare dividends?
As dividends are declared by the board of directors in their board meetings, a stock exchange intimation is filed by the said companies. Stock exchanges where the company is listed, mostly NSE (National Stock Exchange) and BSE (Bombay Stock Exchange), host the intimation for the public. That is how the public at large is informed about the decision. Alternatively, several business news channels and websites post such declarations promptly.
To distribute dividends, the company decides on a ‘Record date’. On this cut-off date, all the shareholders who hold shares are noted for the purpose of distributing dividends in proportion to their holdings as on that Record date itself. The price of the share before this dividend Record date is called cum-dividend price, simply meaning a price that includes the dividend factored into it. Post the Record date the share price is ex-dividend share price, simply meaning, price without the dividend factored in. After the Record date, even if one purchases 100 shares, one will not receive any dividend.
Information about the record date is also shared on stock exchange websites by the companies. Make sure to keep an eye on the ‘Announcements’ tab for your company on these websites.
Are dividends always paid by all companies?
No, it depends on the board of directors to declare a dividend on the shares. It is not compulsory for the company to declare any dividend. Companies have a dividend policy that they follow. For listed companies, the dividend policy may be found on their official websites. Dividend policy can be of declaring a fixed percentage of dividend or a fixed amount of dividend or not declaring dividend at all. Generally, shareholders are happy when they receive a dividend. The dividend policy is usually kept steady, unless there are specific events or changes in the company, its management, etc.
Some listed companies that regularly pay a dividend are Steel Authority of India Limited, Bajaj Finance Limited, Tech Mahindra Limited, Indian Oil Corporation Limited, and Coal India Limited.
Is there a tax on dividends?
Yes, under the relevant provisions of the Income Tax Act, 1961, dividends are taxable at the hands of shareholders. Accordingly, tax deducted at source (TDS) is collected by companies and deposited with the central government. For individuals holding a valid Permanent Account Number (PAN) tax is levied at a rate of 10%. For individuals not holding a valid PAN, a rate of 20% is levied. Further, no withholding of tax is applicable if the dividend payable to resident individual shareholders is up to rupees five thousand per annum within the financial year. Do consult your financial advisor on this point before filing your income tax return for the relevant financial year.
Conclusion:
Dividends are a good alternative method of earning through the stock market which can be explored by investors. Investing a sizable amount in shares for a long term (usually more than five years) has a good chance of giving dividend benefits as well as price benefits to investors.
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-Researched & Written by : CS Renucka Vaiddya & Kedar Nadgonde (Financial Analyst & Coach ) | www.kedarnadgonde.com
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