A dividend is a reward that companies offer to their shareholders. The source is the profit of the company. Rewards are given, such as stocks and cash. The company’s board of directors decides the dividend rate with a maximum of the shareholders. But, companies might choose to hold on to their profits, invest in the business again and use it in the future. In addition, when it is out that the company is going to give dividend to it’s investors, then there is an increase or decrease in the company’s stock value.
Types of Dividend
A company might pay a dividend to the investors in other ways. Just like that, depending on the rate of declaration, there are two kinds of dividend through which the investors receive the dividend as:
1. Special Dividend
Special dividend is paid on common stock. Company It is frequently released in a specific situation like when a company has made a good profit in the past few years.
2. Preferred Dividend
The preferred dividend is released to the preferred stock investors and generally gives a certain sum of money that is paid once a quarter.
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Common Types of Dividends
1. Stocks
A company gives stocks as dividends by releasing new stocks. As it is seen, the stock dividends are given on a pro-rata basis, in which the investor earns dividends as per the number of their stocks in a company.
2. Common Stocks
Common stocks are the profit given to the common stockholders of a company from the profits.
3. Cash
Many companies prefer to pay a dividend to their investors in cash. It is electronically wired or is given in the form of a cheque.
4. Assets
Companies can also present the rewards to their shareholders through real estate and physical assets. But, offering assets as dividends does not happen very often.
How to Calculate Dividend Profits?
You can calculate dividend profits through the dividend payout ratio, in which, the annual dividend of each stock is divided by the earnings of each stock. The formula is:
Dividend Payout Ratio = Dividends paid/Reported net income
You can calculate retention ratio by dividing the dividend paid per share by earnings. The formula is:
Retention Ratio = Dividend per share/Earnings per share
Through the dividend payout ratio, one can easily determine the sum of cash the company will give to its shareholders. In addition, the Ratio is useful for calculating the sum, which is then for growing the company’s position and clearing off any sort of debt.
The dividend payout ratio is also helpful in finding a company’s longevity. Consider an example where a company that has a 100% payout ratio indicates that it is giving out more than what shareholders are making. All this could lead to the closing of a company for reducing the offerings. On the flip side, a company with a consistent dividend payout ratio reveals a solid financial base.
Why Do Companies Pay Dividends?
Companies sell shares to the public for increasing money. In return, the company can use this money to develop and grow their business operations.
When a company stops offering dividends, it is an indication that there is a problem in the business. When the company decrease dividend , it is an indication that the business is looking for a different method to get more returns for the shareholders in the future. On the flip side, when a company offers dividends, it does not have other methods of generating profits, which is why it does not do any sort of reinvestment. These are useful for companies to allure investors to invest and purchase their stocks.
Dividends in Investing
Dividends are generally linked with investing. In the case of dividend investing, the focus is to purchase stocks in a company that can generate a good amount of profit. The investor purchases shares and gets the dividend payout based on their shareholding. People generally use Dividend investing for expanding and value investing and is the method of investing in good companies that generate consistent profits or investing in small companies to raise the share price in the future.
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Final Word
So with this, we have reached the end of this article. Now you know what dividend in the Indian stock market is.
It is seen that there are several causes on why a company might select to offer dividends; wherein for attracting and getting investors to purchase their stocks. When the company gives the dividend, it’s common that the stock prices might go down as the company pays the money through the profit made.
