[Infographics] What is Dividend? | Definition and Types (Fully explained)

In simple words, the dividend is the reward given to shareholders by a company. It is given from the profits earned by the company. It is given after calculating the expenses.

That’s why shareholders are also known as residual owners. But many companies don’t go for distributing all the profits to shareholders, they keep some amount for future endeavors.

Stock dividend infographics by Kamlesh Rode

What is a stock dividend?

The dividend is a cash payment given to the holders of company stock and distributed among the shareholders in the form of cash or stocks. The dividend is a way of sharing profits with the shareholders.

In simple terms, people start contributing to the companies by buying shares. They directly help companies to get manifold growth. In return for this favor, the company gives dividends in the form of cash or stocks.

Let’s Know-how dividend is decided

1. It is not easy for a company to decide how much dividends to return. The board of directors considers the following factors to decide dividend value

2. Company tries to give a stable rate of dividend and if the company is in profit or loss, it decides the value of dividends.

3. Not every year a company announces dividends, it solely depends on the decisions made in the company management.

4. If the company earns a good profit but if it is illiquid company chooses to give bonus shares to shareholders, not cash.

5. Generally companies in the same sector follow the same dividend policy. The company always needs to have a check on competitor’s dividend policy, if they are paying more then investors could invest in the competitor companies.

6. If a company is growing then it will keep the finance reserve for the future to grow more. On the other hand, saturated-type companies offer more dividends due to lower growth prospects.

Types of dividend

1. Cash dividend

Dividend paid in the form of cash directly to the shareholder’s account is cash dividend. The payment is made electronically (wire transfer), but may also be paid by check or cash. It is paid year to a year out of profit and tax.

For example: If a company issues a cash dividend equal to 5% of the stock price, shareholders will see a subsequent loss of 5% in the price of their shares.

2. Stock dividend

Dividends are paid out to the shareholders in the form of stocks by issuing new shares in the company. Stock dividends are in the form of bonus shares issued by the company.

For example: When a company declares 10% stock dividends, this means every shareholder gets an additional 10 shares of every 100 shares they already acquired.

3. Bond dividend

The bond dividend is aka (also known as) script dividend. If the company is not in a position to pay dividends they committed in past, the company then promises to pay shareholders at a future date with the help of the issue of bond or notes.

For example: If the company’s shares are selling for Rs.50 and the cash dividend was 5 then investors might be offered a scrip dividend that enables them to receive one share of stock for every 50 shares they have.

4. Property dividend

Property dividend is also known as asset dividend, it is distributed under exceptional circumstances. This type of dividend is not allowed in India.

For example: If the board of directors in the company approves a property dividend issue to the 10 lac shareholders and distributes its value of Rs.800 to each shareholder. The fair market value of the assets being paid to shareholders is 80 crores.

Pros and cons of dividend

Pros of dividend	Cons of dividend
Regular payouts	If profits are not reinvested in the company and dividends paid fully then it will affect fewer growth prospects of the company.
Dividends can offset a drop in the share price	Most of the dividend stock only earn 2-3%
Passive income stream	The non-dividend stock earns 5-8%
Options to reinvest dividends	Dividend stocks don’t  usually gain as much value over the time
Quick return on investment (only have to wait until the next dividend payout)	Needs to research and pick out stocks on your own rather than following any tip.

How to calculate dividend yield?

The formula for computing the dividend yield is

Dividend Yield = Cash Dividend per share / Market Price per share * 100.

Suppose a company with a stock price of Rs 100 declares a dividend of Rs 10 per share. In that case, the dividend yield of the stock will be 10/100*100 = 10%.

Example (AT&T): (1.96/39) * 100 = 5.02%

The * 100 is for converting a decimal into a percent.

Should I invest in a dividend yield or not?

Well answer to this question depends on the investor but dividends are the best way to grow wealth through compounding which provides you with more shares year to year when the dividends are declared.

If you have a company with past record of stable dividends then shareholders have an edge to receive a reliable income stream as long as the company paying dividends.

Many of the investors are now turning to dividend-producing stocks as a strategy to increase income without turning to fixed-income assets.

The dividends can fluctuate as per the growth of the sector and its performance. Dividends can decrease, yes you read it right!  

Dividends are not a guarantee and can be subject to certain company-related risks or economic crises.

One of the most important factors that determine an investors’ success is the length of time they stay in the market and followed by the diversity of their portfolio because single stocks rarely make investors a fortune.

High dividend-paying stock companies

1. ITC Ltd.

• ITC Ltd. which is also known as Imperial Tobacco Company started as a Cigarette company, but know it is the king in Tobacco as well as FMCG Sectors. Also it has business in Education, Hotels, PaperBoards, Packaging, etc.
  • Dividend Yield: 5.12%
  • Payout Ratio: 55.98%

2. Power Grid

• Power Grid is State Owned Company based out of Gurugram. The main business of the company lies on Power Transmission. The company was set up in 1990s and now it is a MAHARATNA Company.
• Power Grid transmits almost 50% of total power generated in India.
  • Dividend Yield: 5.15%
  • Payout Ratio: 43.43%

3. Baja Auto Ltd.

• Bajaj Auto is based out of Pune, Maharashtra and its product range is focused on two-wheelers and three-wheelers. The company was founded way back in 1945 by Jamnalal Bajaj. It initially imported two- and three-wheelers before venturing into manufacturing itself in the late 1950s.
  • Dividend Yield %: 3.62%
  • Payout Ratio %: 66.63%

4. Tech Mahindra Ltd.

• Tech Mahindra is a subsidiary of the Mahindra Group. It provides information technology (IT) services to businesses and is one of the top five IT firms in India. The company started as a joint venture with British Telecom which ended in 2012. There are a few of the business areas of the company: Infrastructure and Cloud Services, Data Analytics, Cyber Security, Digital Supply Chain, Business Process Services etc.
  • Dividend Yield: 1.63%
  • Payout Ratio: 32.42%

5. GAIL India Ltd.

• Gail Ltd., which was earlier known as Gas Authority of India Ltd. Its businesses are branched out to the following verticals: Natural Gas, Liquid Hydrocarbons, LPG Transmission, Petrochemicals, City Gas Distribution and a few more. The company was incorporated in 1984 as a Central Public Sector Undertaking (CPSU). It is based out of New Delhi.
  • Dividend Yield: 5.34%
  • Payout Ratio: 24.58%

How much you can earn from dividends?

Dividends:

Dividends are the profits that a stock company shares with shareholders decided by the board of directors.

Dividend yield:

It is the ratio of annual dividend per share divided by the price per share. The formula is given below

Dividend yield = (Dividends per share/price per share)

For example, if a company gives an annual dividend of Rs.10 and its current market price is 200, the dividend yield of the company will be 10/200= 5%

Suppose you bought 100 stocks of a dividend-paying company at Rs.200. If you get Rs.10 annual dividend. So, for the first year, the dividend yield will be 5%. This yield is small here compared to the returns from most of the debt investments.

Nevertheless, let us assume that the company is fundamentally healthy and going to give consistent (increasing) dividends in the upcoming years. Here is a table describing the annual dividends in the upcoming years.

Moreover, along with the dividends, your capital will also appreciate in value as you are holding the stock for a long time. In the next 5 years, maybe the purchase price of Rs 200 has now appreciated to Rs 400, 500 or whatever high price.

Important points before investing in high dividend-paying stock companies

Well if you see from my point of view never buy stock on basis of how much dividend the company gives. Always look for a company with good fundamentals, having a good balance sheet, good management, and having a positive trend.

Even if we look at dividends varies from sector to sector and stocks to stock.

For example, ITC and Coal India are high dividend-paying stocks with dividend yields of 5.21% and 12.56% as per the current date. Whereas SBI bank has 0 dividend yield as per the current date.

Now you must know what dividend yield to understand this concept clearly is.

The dividend yield is the ratio of dividends given to a person to the current share price in terms of percentage. let’s take an example:-

There is a company XYZ having a share price of 100 and it gives a dividend of Rs10 then its dividend yield is 10 %. If the share price of this company drops to 50 then the dividend increase to 20% and if the share of this company rose to 200 then the dividend yield will be 5%.

In a simple way, you can understand that dividend yield is % of return you get on your investment only from dividends.

Well answering your question I will say that my dividend income is only about 2% of my total investment as it greatly depends on which sector or stocks you invest in.

Conclusion

Many believe that dividend investing is a great way to create a steady flow of income. It can help investors enhance returns when markets are favorable.

This also gives investors the ability to achieve positive results even when markets are unfavorable and hence reduces the risk in the portfolio considerably.

Finding companies that pay dividends and are growing at a healthy rate can give you good capital appreciation as well going forward.

Why dividend is so important in the fundamental analysis of the stock? Please read the fundamental analysis written by the stock forecast team

Frequently asked questions(FAQs)