Let's Talk Dividends - Almost everything about Dividends you need to know - Course 3

1. Introduction
2. Terms To Know And Other Basics
3. Investing In Dividend Stocks
4. Doing your homework
5. Conclusion

Introduction

A dividend is a distribution of a portion of a company's earnings to its shareholders. Dividends can be in the form of cash, and stocks. Most stable companies offer dividends to shareholders.

Investing in dividend-paying stocks can be an effective method of building long-term wealth. 

Terms To Know And Other Basics

Cash Dividend Cash payments made to stockholders, paid on a per share basis, quoted as a rupee amount. Cash dividends are typically paid out of the company's current earnings or accumulated profits.

Date of Announcement : This is the Day the Company makes the Announcement of the Dividend

Rate of Dividend : The Amount of Dividends paid per share.

Financial Year : Fiscal Year to which the Dividend is applicable.

Shareholder Approval : whether or not the Shareholders need to approve the dividend.

XD : The date on which the Dividend will be excluded for the Purchasers.

For example, stock ABC recently announced a cash dividend with an ex-dividend date of December 7. If you purchase 100 shares of ABC stock on December 7 (on or after the ex-dividend date) you will not receive the dividend; the person from whom you bought the shares will receive the dividend. If, however, you purchase the shares on December 6 (before the ex-dividend date) you will be entitled to receive the next dividend. The ex-dividend date for stocks is typically set one business day before the date of record. A stock's price may increase by the rupee amount of the dividend as the ex-date approaches. On the ex-dividend date, the exchange may reduce the price per share by the rupee amount of the dividend.

Payment : The Date on which the Dividend will be paid

Scrip dividends : Shares are offered in place of Cash. Ex. 1 for 50 shares of ABC company. Here you will get 1 share for every 50 shares you own. The cash equivalent per share is calculated at the closing price on the last day before the XD date. Let's say the closing price is 10, then you divide 10 by 50 = =/20 cents.                             

Investing In Dividend Stocks

Many people invest in dividend-paying stocks to take advantage of the steady payments and the opportunity to reinvest the dividends to purchase additional shares of stock. Since many dividend-paying stocks represent companies that are considered financially stable and mature, the stock prices of these companies may steadily increase over time while shareholders enjoy periodic dividend payments. In addition, these well-established companies often raise dividends over time. For example, a company may offer a Rs. 2.50 dividend one year, and the next year pay a Rs. 3.00 dividend. It's certainly not guaranteed; however, once a company has the reputation of delivering reliable dividends that increase over time, it is going to work hard not to disappoint its investors.

A company that pays consistent, rising dividends is likely to be a financially healthy firm that generates consistent cash flows (this cash, after all, is where the dividends come from). These companies are often stable, and their stock prices tend to be less volatile than the market in general. As such, they may be lower in risk than companies that do not pay dividends and that have more volatile price movements

Because many dividend-paying stocks are lower in  risk ( Specially the Large Long Standing Companies), the stocks are an appealing investment for both younger people looking for a way to generate income over the long haul, and for people approaching retirement - or who are in retirement - who desire a source of retirement income.

Contributing further to investor confidence is the relationship between share price and dividend yield. If share prices drop, the yield will rise correspondingly.

Doing Your Homework And Taxes

Similar to any other investments, it is important to perform due diligence prior to making any dividend-related decisions. There are several factors to consider when researching and selecting dividend stocks, including the dividend yield, dividend coverage ratio and the company's history of dividends.

Dividend YieldAs mentioned previously in this tutorial, the dividend yield shows how much a company pays in dividends each year relative to its share price. It is calculated by dividing the annual dividends per share by the price per share.  It is calculated as follows:






Dividend Yield = (Dividend Per Share/Share Price)*100


It would make sense that the higher the dividend yield, the better the investment, but this financial ratio can be deceptive. Remember that this ratio increases as share prices drop. A dividend yield that is unusually higher than other stocks in the same industry may indicate that the stock's price may drop, or that future dividends will be cut or eliminated. This can spell double-trouble for investors who will lose money both on the falling stock price and the loss of any future dividend income.

Dividend Coverage Ratio The ratio between a company's earnings and its net dividend to shareholders is known as dividend coverage. This ratio helps investors measure if a company's earnings are sufficient to cover its dividend obligations. Dividend coverage is calculated by dividing earnings per share by the dividend per share:




Dividend Coverage = Earnings Per Share/Dividends Per Share
For example, a company that has earnings per share of Rs. 7 and pays a dividend of 2.5 would have dividend coverage of 2.8 (7 ÷ 2.5 = 2.8).

In general, a coverage ratio of 2 or 3 shows adequate coverage and that the company can afford to pay a dividend. If the ratio falls below 2, it could indicate that a dividend cut is on the horizon. If the ratio falls below 1, the company is likely using last year's retained earnings to cover this year's dividend. A ratio that is high, such as greater than 5, may indicate that the company is "holding out" on investors and could have paid a larger dividend to shareholders.

Continuous RecordsCompanies that boast consistent dividends, particularly if dividends increase over time, are typically financially stable and well-managed. While a good track record does not guarantee future results, a company that has performed well in the past may be less risky than one with a spotty or inconsistent history.

Taxes - 

Generally Dividends has a withholding tax of 14%, but certain companies are partly or fully exempted from taxes. 

Conclusion - 

Many investors seek dividend-paying stocks as a means of generating income and growing wealth. As with any investment, it is important to do your homework and find investments that are suitable to your investing style, time horizon, financial situation and financial objectives

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