Dividends are usually paid per share, and the company's board of directors decides whether to distribute dividends or not, even if the company has made a profit. So, owning shares of a profitable company doesn't guarantee dividend payments.

Think of dividends like a thank-you note from the company for being a shareholder, but only if they decide to send one!

Understanding Dividends

Let's say a company with a share price of Rs. 300 and a face value of Rs. 10 declares a 50% dividend. The dividend paid per share would be Rs. 5 (Rs. 10 x 50%), not Rs. 150 (Rs. 300 x 50%). The dividend yield would be 1.66% (Rs. 5 ÷ Rs. 300).

Dividends are seen as a sign of a company's financial health, as they distribute a portion of their reserves to shareholders. However, some investors believe that paying dividends is a waste, especially for fast-growing companies that could reinvest their profits for even more growth.

In India, dividends received from equity shares are tax-free, making them an attractive income stream for investors.

What Are Dividend-Paying Stocks?

Dividend-paying stocks are shares in companies that regularly distribute a portion of their profits to their shareholders. These companies are attractive investment opportunities because they offer a relatively stable income stream, even if the stock price fluctuates. Investors seeking regular income often include dividend-paying stocks in their portfolios.

Some investors choose to reinvest their dividend payments, allowing them to accumulate more shares over time. This long-term strategy can lead to significant wealth accumulation, as the reinvested dividends generate even more shares, potentially leading to substantial returns.

Holding onto dividend-paying stocks for an extended period and reinvesting the dividends annually can result in remarkable wealth growth over time.

Understanding Dividends Better

Dividends are typically declared as a percentage of the share's face value, which can range from Rs. 1 to Rs. 10. For example, a 100% dividend on a Rs. 1 share means the dividend payment is Rs. 1 per share.

Not all companies share their profits with investors. Some reinvest their profits to grow the business and potentially earn higher returns in the future. Some companies, even after achieving success and stability, choose not to distribute dividends to their shareholders. Bharti Airtel, a well-established company, is a notable example. Despite being in business for many years, it only declared its first dividend in 2009.

Face Value of a Share

A company's capital is divided into shares, and each share has a face value. For example, a company with a capital of Rs. 10 crores can be divided into 1 crore shares with a face value of Rs. 10 each.

The face value is different from the market value, which goes up or down based on supply and demand. For instance, a share with a face value of Rs. 10 may be traded at a market value of Rs. 100 or Rs. 8.

Remember, dividends are always declared based on the face value, not the market value.

When do They Pay Dividends?

Dividends are typically paid every quarter, but companies can also pay dividends on a monthly or annual basis ¹. The dividend calendar shows the companies that have upcoming ex-dividend dates, along with their payment dates and yield ¹. Here are the key dividend dates to keep in mind.

• Ex-dividend date: Determines which shareholders receive the dividend

• Record date: The day on which a shareholder must be in the company’s books to receive the dividend

• Payment date: The date on which the dividend is paid to shareholders
  Some investors target the best high-dividend stocks, which are known for their dependable and attractive returns.

Dividend Yield

Dividend Yield is a ratio that shows how much dividend you'll earn compared to the current market price of the share. It helps you understand what return you'll get on your investment.

Let's consider two IT companies, Wipro and Infosys, as an example. They declare annual dividends of 200% and 270%, respectively. At first glance, Infosys seems to have done better. However, since dividends are paid based on the face value of the share, we need to consider the percentage. Wipro's dividend per share is Rs. 4 (200% of Rs. 2 face value), while Infosys' dividend per share is Rs. 13.50 (270% of Rs. 5 face value). Surprisingly, Wipro's dividend yield is higher (1.2%) due to its lower market price, while Infosys' dividend yield is lower (0.8%).

Interestingly, companies with high promoter holdings (45-75%) like TCS, RIL, HCL, Wipro, and Sterlite Industries tend to declare dividends regularly.

Dividend Coverage

The dividend coverage ratio shows if a company's earnings are enough to support its dividend payments. It reveals how easily a business can pay dividends from its profits. A high ratio indicates that the company can easily afford to pay dividends, while a low ratio suggests that the business might struggle to make dividend payments.

The formula for dividend coverage is:

Dividend Coverage = Earnings Per Share (EPS) ÷ Dividend Per Share

A higher dividend coverage ratio is generally considered better, as it indicates a company's ability to sustain its dividend payments.

Dividend Cover

The dividend cover ratio is calculated by dividing the net profit available to equity shareholders by the dividends paid to equity shareholders. This ratio helps investors and analysts assess a company's ability to pay dividends and evaluate its dividend policy.

Here's the formula again:

Dividend Cover = Net Profit available to Equity Shareholders ÷ Dividends paid to Equity Shareholders

A higher dividend cover ratio indicates that a company has sufficient earnings to cover its dividend payments, while a lower ratio may suggest that the company may need to borrow funds or use its reserves to meet its dividend obligations.

Bonus Shares

Bonus shares are extra shares issued by a company using its reserves. When a company issues bonus shares, the total number of shares increases, but the shareholder's ownership percentage remains the same. Although the share price may drop after a bonus issue, the shareholder's overall wealth doesn't change.

Bonus shares are seen as a positive sign from the company, which can lead to increased demand and a higher share price. Since bonus shares are not purchased with cash, they are considered to have a zero cost basis when calculating capital gains.

In simpler terms, bonus shares are like a bonus from the company to its shareholders, and they don't affect the shareholder's overall wealth or ownership percentage.

Why Companies Make a Bonus Issue of Shares?

Companies issue bonus shares for several reasons:

1. Conserve cash: Bonus shares allow companies to reward shareholders without spending cash, which can be used for investment opportunities or maintaining liquidity.

2. Liquidity issues: If a company faces cash flow problems or loan restrictions, bonus shares help satisfy shareholders without requiring cash payments.

3. Increases trading activity: Bonus shares reduce the dividend rate, making the share price more attractive and increasing trading activity, benefiting small investors.

4. Cost-effective: Bonus issues are inexpensive, with no underwriting commissions or brokerage fees.

5. Existing shareholders benefit: Bonus shares are allotted proportionally to existing shareholders, rewarding their loyalty.

Overall, bonus shares are a way for companies to show appreciation to their shareholders while maintaining financial flexibility.