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Beginners guide to dividends in stock market

3 Mins 24 Nov 2021 0 COMMENT

What is a dividend?

A dividend is a part of the profit that company gives to its shareholders.

How do dividends work?

When you buy stocks in a company, you become a partial owner of a company. So, the company management and board may decide to reward shareholders by sharing a portion of the profit with the shareholders as a dividend, typically in portion to the units of shares you hold.

When do companies pay dividends?

Dividends are usually paid at the end of a financial year but sometimes companies may also pay dividend in between the year. This is known as interim dividend.

What is dividend yield?

Dividend yield is the annual return that is earned on a stock from its dividend. It can be calculated as:

Dividend Yield= Annual Dividend amount*100/Current market price of a stock.

Who is eligible to receive dividend payout?

Companies typically fix a record date when they announce their intention to issue dividends. To be eligible to receive dividends, you should own the shares on the record date.

Example of dividend

Let’s say you invested in XYZ Ltd. and own 100 shares at the price of Rs. 1000 per share. The company is doing well and decides to give a dividend pay-out of Rs. 5 per share. You will receive the dividend of Rs. 5*100= Rs. 500 in this case. The dividend yield in this case will be 5*100/1000= 0.5%.

Important facts to know about dividends

  • Many companies pay a high dividend that offers a good dividend yield to investors.
  • Several investors prefer dividend-yielding stocks since they provide regular income along with opportunity of capital appreciation.
  • Investing in high dividend yield stocks is a well-accepted strategy.