What payment of dividend?

A dividend is a payment that a company chooses to make to shareholders when the company has a profit. Companies can either reinvest their earnings in themselves or share some (or all) with its investors. Dividends represent income for investors and are the primary goal for many.

The company's dividend policy determines the pattern in which a company would execute its dividend payouts. These dividend policies also determine the dividend payment date or period, how to calculate dividend per share and other such nitty-gritty of dividend payments in India.

Let us look at the dividend payment norms in India in detail.

The two major types of dividends paid in India are interim and final dividends.

1) A company can announce this dividend based on its quarterly or half-yearly performance. The interim dividend is the one that is announced before the Annual General Meeting (AGM) and the announcement of the earnings results of the company. The dividend issuing company is free to cancel or modify the interim dividend anytime after they are announced.

2) The final dividend is the annual dividend announcement of the company that is declared based on the company's performance for that financial year. These dividends are announced along with the company's results. A company cannot cancel the final dividend after it is announced by them.

For these two categories, dividend payments in India can be divided into the following types:

These are the most common types of dividends. Here, the companies pay a fixed amount of cash per share to the shareholders as dividends.

Sometimes, a company issues dividends in the form of bonus stocks. These bonus stocks are additional shares that a company issues for its shareholders. A company can issue less than 25% of the previously issued shares as stock dividends. However, companies can give more than 25% of the previous issue in case of a stock split.

In India, companies issue shares of subsidiary companies as property dividends. These companies are independent but majorly owned by the same owners.

If a company cannot pay cash dividends at a time, it can offer scrips or promissory notes for future payment of dividends.

The dividend payment process in India can be divided into four important dates. These dates are the dividend declaration date, date of record, the ex-dividend date and the payment date. Let's understand the significance of each of these dividend payment dates.

Companies announce dividends (both interim and final) through their board of directors. At the dividend declaration date, an intention to pay a dividend is sent to the investors. Therefore, this date is recorded as the dividend declaration date for accounting purposes.

Dividends are entered as liabilities in the company's book of accounts.

The company announces its dividend date of record on the dividend declaration date itself. And on this day, the company shareholders are reviewed and determined for dividend payments. Only investors that are "holders of record" are eligible to receive dividends from the company. Then the company decides its ex-dividend date.

The company only pays dividends to investors who have purchased its shares on or before the ex-dividend date. An investor who has purchased the company's shares after the ex-dividend date is not eligible to receive the dividend.

The company declares the dividend payment date on the dividend declaration date itself. The payment date is the final stage of dividend payout in India. At this date, the company distributes dividends to its shareholders.

This is the process of four levels through which dividend payments are made in India.

Dividend payments in India are announced based on the following questions:

a) Is the company making profits?

The most important factor on which a company's dividends are based is profits. The higher the profits, the higher the potential dividends.

b) Does the company always pay dividends?

Another factor is whether the company is a dividend stock. If a company has a long history of dividend payments, then its dividend amount will be stable. This encourages investors looking to make stock investments to earn regular dividends.

c) What are the dividend trends of similar industries?

A company's dividend also depends on how much dividend other similar businesses pay to their shareholders. Generally, to retain their shareholders, companies pay competitive or industry-matching dividends.

d) Is the company planning to reinvest its earnings?

Sometimes, a company might have plans for business expansion. In such cases, the company might not pay dividends. They would rather reinvest their profits into their business to fund their expansion.

Dividends are an effective way of retaining shareholders. Distributing dividends can be beneficial to both investors and businesses. To investors, they provide a second source of earning apart from capital gains. Similarly to businesses, dividends present financial strength and stability of business of a company. A company paying regular dividends sustains investors' trust in the company and also can attract new investors looking for regular dividend earnings.

You will receive dividend payments in your registered bank account. You can invest in dividend stocks with a history of regular dividend payouts. You will receive the declared dividend on the dividend payment date.

You will be eligible to receive dividends only if you have purchased a company's shares before its ex-dividend date is declared.

There is a limit on the dividend payment made for share dividends. The amount of dividend to be paid in terms of stocks is limited to 20% of the previous issue of shares. This norm is relaxed in case of stock splits by the company.

Periodic and industry-matching dividends are considered good by the investors. Investors prefer dividend stocks to regular ones because they can offer periodic dividends.

The announcement date is also known as the declaration date. It is when when a company declares it will pay a dividend to its shareholders. It includes information on the dividend amount, record date, and payment date.

A dividend can be described as a reward that publicly-listed companies extend to their shareholders, and its source is the company’s net profit. Such rewards can either be in the form of cash, cash equivalent, shares, etc. and are mostly paid from the remaining share of profit once essential expenses are met. A company’s board of directors decides the rate of dividend, wherein, the approval of majority shareholders is also factored in.

However, companies may decide to retain their accumulated profits to reinvest in the business or reserve it for future use. Further, announcements about dividend income declaration mostly accompany a significant change in the company’s stock value.

A company may pay a dividend to its shareholders in different forms. Similarly, depending on the frequency of declaration, there are two major types of dividend that shareholders are rewarded with, namely –

This type of dividend is paid on common stock. It is often issued under a particular circumstance when a company has accumulated substantial profits over several years. Mostly such profits are looked at as excess cash that does not need to be used at the given moment or in the immediate future.

Such a dividend is issued to the preferred stock owners and usually accrues a fixed amount that is paid quarterly. Also, this kind of dividend is earned on shares that function more like bonds.

Interim dividend is declared by companies before the preparation of the final full-year accounts. Here, in the Indian context, the 'year' being referred to is the period between April of one year and March of the next year. This is the duration for one financial year in India.

A final dividend is declared after the accounts for the year are prepared.

Besides these, the list below highlights the most common types of dividend-

Most companies prefer to pay a dividend to their shareholders in the form of cash. Usually, such an income is electronically wired or extended in the form of a cheque.

Some companies may reward their shareholders in the form of physical assets, investment securities and real estates. However, the practice of offering assets as dividends is still quite rare among companies.

A company offers stocks as dividends by issuing new shares. Typically, the stock dividends are distributed on a pro-rata basis, wherein, each investor earns dividend depending on the number of shares he/she holds in a company.

Typically, it is the profit that is paid to the common stockholders of a company from its share of accumulated profits. The share of this dividend is often decided by the law, especially when the dividend is set to be paid in cash and may lead to the company’s liquidation.

Other than these, a company may decide to offer shares of a new company, warrants and other financial assets as a dividend. Nonetheless, it must be noted that dividend income tends to influence a company’s share price accordingly.

It must be noted that paying dividends to shareholders may not influence the overall value of the business venture. Regardless, such a move tends to lower the overall equity value of the venture by the exact amount that is being paid as a dividend. To further elaborate, dividend once paid out goes debited from the accounting books permanently and is an irreversible move.

Further, when a company declares a dividend, its share prices undergo a significant increase governed by market activities. They are more likely to pay a premium in the hope of earning dividends. However, the share prices start to decline by a similar proportion once the date of dividend eligibility expires. Such a fall usually occurs when new investors are not deemed eligible to receive dividends and are hence reluctant when it comes to paying the associated premium.

Similarly, if the market is anticipated to remain optimistic until an ex-dividend date, the increase in stock’s value may be higher than the dividend offered. Irrespective of reductions, such an occurrence often leads to an increase in the overall value of a company’s stock.

Regardless, to understand the impact of dividend declaration on stock prices individuals need to become familiar with the important dates about dividends.

For instance, the table below highlights the most important dividend dates.

A dividend is calculated by using the dividend payout ratio, wherein, the annual dividend per share is divided by earnings per share. The said ratio can be expressed as –

Dividend Payout Ratio = Dividends paid / Reported net income

Notably, the dividend payout ratio is 0% for those companies who do not offer dividends to their shareholders. Similarly, companies who pay out the total net income as dividends have 0 dividend payout ratio.

Similarly, the retention ratio can be computed by dividing the dividend paid per share with earnings per share. The same can be expressed as –

Retention Ratio = Dividend per share / Earnings per share

With the help of the dividend payout ratio, one can conveniently find out the amount of money a company is offering to its shareholders. Further, the ratio comes in handy to calculate the amount that is reinvested for expanding and improving a company’s operations, paying off existing debt or building a cash reserve.

It also proves useful in assessing a company’s sustainability. For instance, a company with a payout ratio that is more than 100% signifies that it is paying off more than what shareholders are earning. Eventually, such a practice would force a company to either reduce their offering or stop it altogether. On the other hand, a company with a steady dividend payout ratio indicates a robust financial standing.

The steps elaborated below highlight how dividends work -

Step 1 – Publicly-listed companies generate substantial income and accumulate a significant share of retained earnings.

Step 2 – A company’s management decides if they should reinvest their retained earnings or distribute the same among shareholders.

Step 3 – The board members on availing major shareholder’s approval declare dividend on a company’s shares.

Step 4 – Important dates related to dividend declaration are announced.

Step 5 – Shareholder’s eligibility to earn dividend is scrutinised.

Step 6 – The dividend is paid to shareholders.

Conversely, business owners may decide to reinvest the excess earnings into their business to expand their operations or overall productivity. Subsequently, it must be noted that both retaining and paying off dividends tend to influence the financial model of a business venture.

A dividend is not treated as an expense; instead, it is considered to be an allocation of a company’s retained earnings. Since paying out dividends tends to impact a company’s total equity, it directly influences the entity’s financial modelling.

The table below highlights how dividends affect a company’s financial statements.

Dividend stocks can be defined as those publicly-listed companies which offer regular dividends to their shareholders. Such companies are mostly well-established and tend to possess a fair record of allocating earnings to their shareholders.

Things to consider for choosing a profitable dividend stock –

Keeping these pointers in mind, along with other financial parameters, will help gauge a company’s profitability and financial standing effectively.

A dividend payout ratio tends to indicate the portion of a company’s net earnings that are offered as dividend income. Similarly, a company’s dividend yield highlights the rate of returns that were made available to the shareholders in the form of cash dividends.

Regardless, dividend payout is regarded to be a more useful indicator of a company’s ability to allocate dividend among its shareholders sustainably. Also, it is largely associated with a business venture’s cash flow and further highlights the amount it has paid as dividends in a year. Notably, even the slightest increase in share prices tends to lower the rate of dividend yield significantly.

Consequently, the dividend yield is calculated using the given formula.

Dividend Yield = Annual dividends per share / Dividends per share

It can be said that potential investors who wish to invest in high-dividend yielding stocks must become familiar with the concept of dividend beforehand. Successively, they should take into account the various factors and associated financial parameters for gauging the scope of generating profits by investing in such stocks.

A dividend is a share of profits and retained earnings that a company pays out to its shareholders and owners. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. The annual dividend per share divided by the share price is the dividend yield.

A dividend’s value is determined on a per-share basis and is to be paid equally to all shareholders of the same class (common, preferred, etc.). The payment must be approved by the Board of Directors.

When a dividend is declared, it will then be paid on a certain date, known as the payable date.

Steps of how it works:

Below is an example from General Electric’s (GE)’s 2017 financial statements.  As you can see in the screenshot, GE declared a dividend per common share of $0.84 in 2017, $0.93 in 2016, and $0.92 in 2015.

This figure can be compared to Earnings per Share (EPS) from continuing operations and Net Earnings for the same time periods.

Source: GE

There are various types of dividends a company can pay to its shareholders.  Below is a list and a brief description of the most common types that shareholders receive.

Types include:

When a company pays a dividend it is not considered an expense since it is a payment made to the company’s shareholders. This differentiates it from a payment for a service to a third-party vendor, which would be considered a company expense.

Managers of corporations have several types of distributions they can make to the shareholders. The two most common types are dividends and share buybacks. A share buyback is when a company uses cash on the balance sheet to repurchase shares in the open market. This has two effects.

(1) it returns cash to shareholders (2) it reduces the number of shares outstanding.

The reason to perform share buybacks as an alternative means of returning capital to shareholders is that it can help boost a company’s EPS. By reducing the number of shares outstanding, the denominator in EPS (net earnings/shares outstanding) is reduced and, thus, EPS increases.  Managers of corporations are frequently evaluated on their ability to grow earnings per share, so they may be incentivized to use this strategy.

When a company pays a dividend, it has no impact on the Enterprise Value of the business. However, it does lower the Equity Value of the business by the value of the dividend that’s paid out.

In financial modeling, it’s important to have a solid understanding of how a dividend payment impacts a company’s balance sheet, income statement, and cash flow statement. In CFI’s financial modeling course, you’ll learn how to link the statements together so that any dividends paid flow through all the appropriate accounts.

A well-laid out financial model will typically have an assumptions section where any return of capital decisions are contained. For example, if a company is going to pay a cash dividend in 2021, then there will be an assumption about what the dollar value will be, which will flow out of retained earnings and through the cash flow statement (investing activities), which will also reduce the company’s cash balance.

Thank you for reading CFI’s guide to Dividends. To keep advancing your career, these additional CFI resources will be useful:

A company's board of directors is responsible for its dividend policy and determining the size of a dividend payment. Depending on a company's growth goals, earnings and cash flows, its industry, and other factors, the board will determine an appropriate (if any) dividend payment.

This can vary from one industry to the next and among companies in different growth phases. Industries that are lower growth but generate stable earnings and cash flows, such as utility companies, often prioritize higher dividend payments to attract investors. Companies in sectors that are more cyclical, such as consumer discretionary goods, may pay a lower portion of their earnings -- the payout ratio -- as dividends, prioritizing their ability to maintain the dividend payment when business is weaker.

Whether you want dividend stocks as a source of income or for more cash to reinvest in your stock portfolio, it's important to know how a company pays a dividend. The short answer is that a company pays a dividend from its earnings. When a company earns a profit, it essentially has three things it can do:

In a broad sense, if a company doesn't have a clear internal use for excess profits, returning them to investors by paying a dividend is ideal.

A company that doesn't generate regular or consistent earnings, or is not yet profitable -- like many start-ups or high-growth companies that are aggressively spending to expand their operations -- may not be able to pay a dividend. These companies have better use for their earnings, or they simply don't generate enough earnings to afford a dividend.

In a few instances, a company may pay dividends in stock, not cash. While it's rare, it's important to make sure you know whether this is the case, especially if you're counting on those dividend payments for income today.

You may also earn something called substitute payments in lieu of dividends. This happens when you own a dividend stock but allow your broker to lend it out to a short-seller. In this case, the dividend doesn't technically come to you, so the short-seller reimburses the dividend to you. The upside is you earn extra money by lending your shares and continue to earn the dividend equivalent. The downside is additional tax complications, depending on what kind of brokerage account you're using.

The vast majority of dividend stocks pay dividends quarterly, although there are some companies that make dividend payments monthly and a very small number that make annual and semiannual dividend payments. This recurring, expected dividend is generally called a regular dividend.