Dividend Income
In this blog, you will learn about Dividend Income.
Whenever you invest in the stock market you have 2 options to earn money.
1st is when the stock price of the company you buy increases. Let's suppose you buy a company's share at Rs 100 and after 1-year the share price increases up to Rs 200. Then 100 Rs will be your profit.
2nd is when you invest in a company that pays dividends. You get dividends regularly just like your salary.
Now let us understand What Are Dividends.
Whenever a company earns profit it has 2 ways to use that profit.
The first way is by reinvesting the profit to acquire other companies or to expand their business.
The second way is by distributing its profit to its shareholders. In this case, every shareholder will get a particular amount known as dividends which the company decides. Dividends are part of the profit which is distributed among the shareholders. Usually, dividends are paid by those companies which are well established or don't have any further chances of growth. The companies which are small or are at loss never give dividends because small companies will reinvest the profit for expansion and loss-making companies will use the profit to survive in the market.
There are 2 types of dividends.
1st, Interim Dividend
2nd, Final Dividend
The interim dividend is typically one of two dividends given out by a company i.e providing shareholders with income on a semi-annual basis. The interim dividend is usually paid out ahead of a firm's annual general meeting and the release of the final version of its financial statements.
Final dividends are those dividends that are calculated at the end of a financial year based on the company's annual profits.
Now let us discuss 4 important dates about the dividends which everyone investing in the stock market should know.
These 4 important dates are -:
- Declaration Date
- Ex-Dividend Date
- Record Date
- Payment Date
Let us discuss them in detail.
Declaration Date - The declaration date is the day on which the board of directors announces the dividend.
Ex-Dividend Date - The ex-date or ex-dividend date is the date on which if you buy the shares of the company, you will not get a dividend. To get a dividend, you have to buy the share before the ex-dividend date.
Record Date - The record Date is a date that tells which shareholder will get dividends and which shareholder will not get dividends.
Payment Date - This is the date when the company gives the dividend to the shareholders.
Examples Of These Dates Are As Follows.
- Announcement Date - 21 Feb 2022
- Ex-Dividend Date - 14 March 2022
- Record Date - 16 March 2022
- Payment Date - 19 March 2022
Now Let Us Discuss Impact Of Dividend On Company's Financial Health
Paying dividends impacts the equity of the company. As we have discussed earlier, a dividend is a part of the profit which is shared among shareholders.
But if seen, the company can use it for expansion by not giving the dividend, which will increase the price of its share.
Now the question arises why do companies pay dividends?
The answer to this question is, To build trust in shareholders so that they stay invested for the long term and invest more to collect dividends. The company that pays a dividend attracts everyone because everyone thinks that the company that pays a dividend is a good company.
Paying dividends motivates the investor to be invested for the long term.
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