What Is A Dividend – Types, Payment Process, And Importance

Dividends are company profits shared with shareholders, usually paid every quarter as a reward. The board decides the dividend amount based on recent earnings and the company’s financial health.

Think of dividends like a bonus you get just for owning shares. Sounds cool, right?

• Imagine you bought 500 shares of Infosys at ₹1,500 each.
   
• A few months later, Infosys announces a ₹20 cash dividend per share.
   
• That means you’ll get ₹20 × 500 = ₹10,000 directly into your bank or trading account.
   
• Now, let’s say instead, they offer a 10% stock dividend.
   
• You’ll get 10% of 500 = 50 more shares for free. Isn’t that awesome?
   
• So, your holding becomes 550 shares, without spending a rupee more.
   

Dividends are a great way to earn extra while sitting back. Whether it's cash or extra shares, both feel rewarding. Doesn't it sound like a smart way to grow money?

Before we go further, let’s explore the different types of dividends, how the payment process works, and why they matter so much for investors.

What Is a Dividend?

Dividends are payments companies give to their owners from profits. They are usually paid every three months, and the company’s leaders decide how much to give based on earnings.

Let’s explain it with the help of an example:

Let’s say you buy 100 shares of a company called ABC Ltd. The company announces that it will pay a dividend of ₹5 per share this quarter.

Calculation:

₹5 (dividend per share) × 100 (shares you own) = ₹500

So, you will receive ₹500 as a dividend from the company for that quarter.

If the company pays dividends every quarter, and the amount remains the same, you could earn ₹500 × 4 = ₹2,000 per year as passive income from your shares.

This is how companies reward shareholders for investing in them.

Types of Dividends:

Dividends are given in different ways, and each way rewards shareholders differently.

1. Cash Dividends

Cash dividends are direct profit payouts to shareholders, providing immediate income from company earnings periodically. They reduce available reinvestment funds, potentially limiting future growth but rewarding current investors with cash.

Let’s understand it with the help of an example:

Imagine XYZ Ltd. earns ₹500 crore profit this year and decides to share 20 % as dividends.

Dividend pool = ₹500 crore × 20 % = ₹100 crore.

If you hold 1,000 shares and the company has 1 crore shares in total, your share is:

• Dividend per share = ₹100 crore ÷ 1 crore = ₹100
• Your cash dividend = ₹100 × 1,000 = ₹1,00,000

So you receive ₹1,00,000 in cash, while the company keeps the remaining ₹400 crore to run and grow the business.

2. Stock Dividends

Stock dividends are bonus shares given to shareholders instead of cash, based on their existing holdings. They increase ownership without extra investment but don’t offer immediate income and depend on market value.

Let’s understand it with the help of an example:

XYZ Ltd. announces a 20% stock dividend. This means for every 5 shares, you get 1 extra share.

If you own 100 shares, your bonus will be: 100 ÷ 5 = 20 additional shares

So after the dividend, you’ll own:

100 (original) + 20 (bonus) = 120 shares

You don’t get cash, but your total shareholding increases. If share prices go up later, your value grows.

3. Property Dividends

Property dividends are non-cash payouts where companies give physical or intangible assets to shareholders. They help diversify holdings but may lose value and are harder to sell than cash or stock.

Let’s understand it with the help of an example:

XYZ Ltd. earns ₹500 crore in profit and declares 10% as property dividends. Total asset value to be distributed = ₹500 crore × 10% = ₹50 crore

If you’re eligible for 1% of the total dividend, you will receive an asset worth:
₹50 crore × 1% = ₹50,00,000

This asset could be something like a patent license, a land piece, or equipment, not cash or shares.

It adds variety to your portfolio, but its value can fluctuate, and it’s not immediately usable like cash.

4. Scrip Dividends

Scrip dividends offer shareholders a voucher instead of cash, redeemable later for company shares. They provide investment flexibility but depend on future share prices, which may rise or fall.

Let’s understand it with the help of an example:

XYZ Ltd. earns ₹500 crore in profit and declares 10% as a scrip dividend.

Total scrip value = ₹500 crore × 10% = ₹50 crore

If you’re entitled to ₹50,00,000 worth of scrip, you don’t receive shares right away. Instead, you get a voucher worth ₹50,00,000, which you can use later to buy XYZ shares.

If the share price is ₹1,000 at the time you redeem the scrip: ₹50,00,000 ÷ ₹1,000 = 500 shares

You get 500 new shares without spending extra money, but the number may vary if the share price changes.

5. Liquidating Dividends

Liquidating dividends are final payouts made when a company shuts down and sells off its assets. They return leftover value to shareholders but signal the end of the company’s operations permanently.

Let’s understand it with the help of an example:

XYZ Ltd. is closing down and has ₹500 crore worth of remaining assets. They decide to give 50% of these assets to shareholders as liquidating dividends.

Total payout = ₹500 crore × 50% = ₹250 crore

If you're eligible for 0.1% of this amount, you will receive: ₹250 crore × 0.1% = ₹25,00,000

You get ₹25,00,000 from the company’s asset sale. However, this also means XYZ Ltd. will shut down and no longer exist.

How Dividends Are Paid: The Payment Process

Step 1: Company Earns Profit
The company earns profit and decides to distribute a portion of it as dividends to shareholders.

Step 2: Board of Directors Declares Dividend
The board approves the dividend amount, type (cash or stock), record date, and payment date.

Step 3: Dividend is Announced (Declaration Date)
The company publicly announces the dividend details, including per-share amount, record date, and payment date.

Step 4: Record Date is Set
Only shareholders who hold the stock on the record date are eligible to receive the dividend.

Step 5: Ex-Dividend Date Occurs
This is typically one business day before the record date. Investors who buy the stock on or after this date will not receive the dividend.

Step 6: Company Calculates Payouts
The company calculates the dividend amount for each eligible shareholder based on the number of shares they own.

Step 7: Dividend is Paid

• Cash dividends are either:
   
  • Credited to the shareholder’s brokerage account,
  • Mailed as a dividend cheque, or
  • Directly deposited into the shareholder’s bank account.
     
• Stock dividends are issued as additional shares, directly credited to the shareholder’s demat or brokerage account.

Step 8: Shareholder Receives Dividend
On the payment date, shareholders receive their dividends in the form declared, completing the process.

What Is The Importance of Dividends?

Dividends reward shareholders and reflect a company’s stability, attracting both income and growth investors. Stock dividends retain cash for growth, while cash dividends provide steady income from company profits.

Let’s understand it with the help of an example:

Suppose you own 1,000 shares of a company, and the company declares:

• A ₹10 cash dividend per share
• Or a 10% stock dividend

If you choose a cash dividend: ₹10 × 1,000 shares = ₹10,000 in cash goes into your account.

You get immediate income, which is great if you're looking for regular returns.

If you choose a stock dividend:

• 10% of 1,000 shares = 100 extra shares
• Now you hold 1,100 shares without spending more money.
• If the share price rises in the future, your overall value grows more.

This shows how cash dividends provide income, while stock dividends boost ownership and potential future gains.

Conclusion:

Dividends are rewards you get for owning shares in a company. They can be given as cash, extra shares, or even property. It’s a way to earn without selling your stock. Whether you're new or experienced, dividends help your money grow. So sit back and enjoy the benefit your investment is paying you back.

FAQs:

Q: What is a dividend payment?

A: A dividend payment is a part of a company's profits given to shareholders, usually in cash or extra shares.

Q: What is the importance of a dividend decision?

A: A dividend decision balances investor payouts with business growth, showing the company’s financial health and future potential.

Q: How important is dividend growth?

A: Dividend growth shows a company’s financial strength and signals strong prospects, beyond stock price changes.

Q: How are dividends taxed?

A: Dividends are taxed based on their type. Qualified dividends are taxed at lower capital gains rates of 0%, 15%, or 20%.

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