- January 24, 2023
- Posted by: Authors@Abanwill
- Category: Insights
The profits earned in a business can be used in two ways – reinvest the profit in the business or give it out to the owners of the business. It could be a combination of the two as well. The portion of profits given out to business owners / shareholders is called dividend.
Although unstable, dividends are a form of income for investors. A small equity portfolio may not bring a dividend income large enough to make a difference in one’s finances but a large equity portfolio can fund an investor’s living expenses and more just by way of dividends. Many people thrive off the dividend income from their equity investments.
Many portfolios are built keeping in mind the dividend potential of its constituent stocks. If a dividend income portfolio were to be built in India today, it would more likely have PSUs and large, mature consumer companies that give stable dividends.
A stock’s full-year dividends divided by its market price give its dividend yield. A stock priced at, say, ₹500 having a dividend yield of 5% has paid about ₹25 as dividends in the past year. This yield is computed at the market price. The yield earned by an investor is usually different. If you bought that same stock a few years back at, say, 200 your dividend yield today is 12.5% apart from the ₹300 capital gain over the years. By inference, a fundamentally strong stock with poor dividend yields could become a big dividend generator for the portfolio if held for long as is seen in the stock purchased at ₹200 but now trading at ₹500. However, improvement in dividend yield must not come with a decline in share price. Hence, looking for fundamentally strong stocks is imperative.
Understanding dividend payments, however, is a tricky concept. You might own a stock when its dividend was declared and still not get the dividend. It is also possible that you bought the stock after the dividend was declared and still earned the dividend. An understanding of the dividend timeline could help shed some light on these peculiarities.
The numbers 1 to 4 in the aforementioned table represent the chronology of the various dividend dates.
Declaration / Announcement Date: The company announces dividends on this date. It usually coincides with the release of quarterly or annual results. For example, TCS announced an interim dividend of ₹67 per share for FY23 on 09-Jan-2023. Interim dividends for a particular year are paid before the financial year ends. Final dividends are paid after the financial year ends. While interim dividends can be approved by the board, final dividends usually require a majority shareholder approval.
Record Date: The shareholders that appear in the company’s records on this day are entitled to the dividend payment. TCS, in our example, had set 17-Jan-2023 as the record date.
Ex-dividend date: This date is generally two trading days before the record date. Most stock exchanges follow a T+2 settlement cycle. The stocks that you buy today will reflect in your demat account two trading days later. Therefore, in order to appear in company books on the record date, you need to buy the stocks at least two days before the record date. Shareholders appearing in TCS’ books on 17-Jan-2023 which is a Tuesday, must have bought its shares on or before 13-Jan-2023, a Friday. Investors who sell the stock on any day after the ex-dividend date, even before the record date, will still be entitled to receive dividends. (Starting 27-Jan-2023, about 200 of the largest stocks in India will be settled on a T+1 basis. The ex-dividend date for these stocks will be one day before the record date.)
Payment date: It is the day when the dividend is actually paid out to the investors appearing in the company’s books as per the record date. TCS had set 03-Feb-2023 as the payment date.
If your dividend from a single stock exceeds ₹5000, the company will keep 10% as tax deducted at source (TDS). Overall dividend income for resident Indians is taxed at their respective applicable slab rates. While taxation on dividends keeps changing according to the government’s tax policies, the dividend timeline concepts remain largely intact. Having a grip over the timeline becomes especially important if the dividends are meant to fund certain expenses or payables.