Only companies pay dividend distribution tax

Dividends in the hands of the investor is tax free. This means unlike other instruments like fixed deposits, where the interest income is taxable, dividend income is not so. Of course, companies in India that declare dividends have to a pay dividend distribution tax.

An important criteria

Dividend yield in simplistic terms is nothing but the amount of dividend received with respect to the current market price of the stock. Let's say a stock is currently traded at Rs 100 and you buy 100 shares of the company. The cost of buying these 100 shares is 100x100=Rs 10,000. Now, if the company decalres a dividend of Re 1 per share, you get a dividend of Rs 100 on your investment of Rs 10,000. So, the dividend yield works out to 1 per cent. Higher the dividend yield the better it is for the investor. 

Important date to note before buying shares

On the exchanges, there is an ex-dividend date. This means, if you do not own the share before the ex-dividend date, you would not get dividend for your shares.

Very important for the investor to note

The book closing is a particular day fixed by a company during which an investor must be registered as an owner of the shares. It is only then that he will be eligible for the dividend. The book closure generally happens 2-3 days after the shares go ex-dividend on the exchange.

Date on which payment of dividend is made

This is the day when the dividend warrants or other forms of crediting dividend to the shareholder happens.

Another key datapoint to watch

This is the ratio of dividend distributed as a per centage to profits. If a company makes a profit of Rs 1000 and pays a total dividend of Rs 100 to all its shareholders, the dividend payout ratio is 10%. That is profits divided by amount of dividend paid to all shareholders. If the dividend payout ratio is high, it shows a company is more investor friendly.