When you invest in stocks of a company, you become a part-owner of its business. As a part-owner, you get a share in its profits. These profits are called dividends of a stock.
The company's dividend policy determines the pattern in which a company would execute its dividend payouts. These dividend policies also determine the dividend payment date or period, how to calculate dividend per share and other such nitty-gritty of dividend payments in India.
Let us look at the dividend payment norms in India in detail.
The two major types of dividends paid in India are interim and final dividends.
These are the most common types of dividends. Here, the companies pay a fixed amount of cash per share to the shareholders as dividends.
Sometimes, a company issues dividends in the form of bonus stocks. These bonus stocks are additional shares that a company issues for its shareholders. A company can issue less than 25% of the previously issued shares as stock dividends. However, companies can give more than 25% of the previous issue in case of a stock split.
In India, companies issue shares of subsidiary companies as property dividends. These companies are independent but majorly owned by the same owners.
If a company cannot pay cash dividends at a time, it can offer scrips or promissory notes for future payment of dividends.
The dividend payment process in India can be divided into four important dates. These dates are the dividend declaration date, date of record, the ex-dividend date and the payment date. Let's understand the significance of each of these dividend payment dates.
Companies announce dividends (both interim and final) through their board of directors. At the dividend declaration date, an intention to pay a dividend is sent to the investors. Therefore, this date is recorded as the dividend declaration date for accounting purposes.
Dividends are entered as liabilities in the company's book of accounts.
The company announces its dividend date of record on the dividend declaration date itself. And on this day, the company shareholders are reviewed and determined for dividend payments. Only investors that are "holders of record" are eligible to receive dividends from the company. Then the company decides its ex-dividend date.
The company only pays dividends to investors who have purchased its shares on or before the ex-dividend date. An investor who has purchased the company's shares after the ex-dividend date is not eligible to receive the dividend.
The company declares the dividend payment date on the dividend declaration date itself. The payment date is the final stage of dividend payout in India. At this date, the company distributes dividends to its shareholders.
This is the process of four levels through which dividend payments are made in India.
Dividend payments in India are announced based on the following questions:
The most important factor on which a company's dividends are based is profits. The higher the profits, the higher the potential dividends.
Another factor is whether the company is a dividend stock. If a company has a long history of dividend payments, then its dividend amount will be stable. This encourages investors looking to make stock investments to earn regular dividends.
A company's dividend also depends on how much dividend other similar businesses pay to their shareholders. Generally, to retain their shareholders, companies pay competitive or industry-matching dividends.
Sometimes, a company might have plans for business expansion. In such cases, the company might not pay dividends. They would rather reinvest their profits into their business to fund their expansion.
Dividends are an effective way of retaining shareholders. Distributing dividends can be beneficial to both investors and businesses. To investors, they provide a second source of earning apart from capital gains. Similarly to businesses, dividends present financial strength and stability of business of a company. A company paying regular dividends sustains investors' trust in the company and also can attract new investors looking for regular dividend earnings.
You will receive dividend payments in your registered bank account. You can invest in dividend stocks with a history of regular dividend payouts. You will receive the declared dividend on the dividend payment date.
You will be eligible to receive dividends only if you have purchased a company's shares before its ex-dividend date is declared.
There is a limit on the dividend payment made for share dividends. The amount of dividend to be paid in terms of stocks is limited to 20% of the previous issue of shares. This norm is relaxed in case of stock splits by the company.
Periodic and industry-matching dividends are considered good by the investors. Investors prefer dividend stocks to regular ones because they can offer periodic dividends.