What are dividends?
Dividends are part of a company's earning which are paid out to shareholders of the company. This means if you own a share, you are paid a portion of the company's earnings for each share held by you, provided the company makes a profit and the board agrees and recommends a dividend.
Sound profit making companies generally have a long standing track record of dividend distribution, which makes for stable income when compared to others.
Dividend payout ratio
Dividend payout are usually made once a year, depending on the company profits dividend payment is decided. Companies with frequent dividend payouts are considered to have substantial cash balances. A dividend payout ratio is the ratio of profits to dividend distributed. Higher the payout means higher is the amount paid from profits.
Dividend yield ratio is the relationship between dividends of each share and the current market value of the shares. Dividend yield ratio is very important for an proposing investor as it helps him know the return on his investment.
Dividend Yield Ratio = Dividend Per Share / Market Value Per Share
For example consider Allahabad bankis presently traded at Rs 120 per share and declares a dividend of 60% on face value of Rs 10 per share. So if you purchase 100 shares the amount works to Rs 12,000. On this 60% dividend annually would amount to the bank paying the shareholders Rs 600 as dividend. Thus on Rs 12,000 one gets a dividend of Rs 600. The dividend yield thus works out to 5%.
The date when the Board of Directors announced the date for the dividend. The Board will also announce a date of record and a payment date.
Ex dividend date:
If an investor does not own the stock before the ex-dividend date by payment, he or she will not be eligible for the dividend payout. So, one has to keep in mind Ex dividend date before buying stock.
This is the day when the dividend will be given to the shareholders of company.
Book closure date:
The book closing is the day by which investor must be registered as an owner of the stock than only he will be eligible for the dividend. It generally takes two to three working days to get registered as a shareholder of a company, so keep in mind that this is not the last day to buy the stock.
Dividends are tax free
Another interesting part is that dividends are tax free and do not form part of total income for the purpose of tax.
Before investing one has to study track record of consistent dividend payout of the company and compare the dividend yield of few companies, which will help you evaluate whether your company is paying a better yield than others.