Everything You Want to Know About Dividends
You can earn income against your invested capital in the stock market through dividends for which you need to invest in good dividend stocks. But before that, know everything about dividends here and become a better investor.
What is a Dividend?
A dividend is the share of a profit given by companies to their shareholders. It is issued as cash payment. When it's paid during the financial year, it's called “Interim Dividend. And when paid at the end of the financial year, it's called “Final Dividend.” The decision to give a dividend or not rests with the company's board of directors. But sometimes, despite a loss, they may still give it if they have a healthy cash reserve and are willing to part with shareholders.
How dividend is calculated?
When a company issues a share, it decides the face value, which forms the base value for accounting and dividend. For example, let's say the market value of ABC company's share is Rs. 1000 and the face value is Rs. 10. If the company decides to pay 200% as a dividend, this means shareholders are given 200% of the share's face value.
The formula used for the dividend is: 10 * 200/100
This comes to Rs. 20. So you will earn Rs. 20 as a dividend behind one share.
What is Dividend Yield?
How much dividend you will get against the market value of each share is found out by dividend yield. Let's say ABC and XYZ companies have decided to give a dividend of Rs. 20 against each share. Here, the dividend yield is used to find out which company is giving more dividends against its share's market value.
The formula used for dividend yield is:
Dividend per share/market value of per share
Let's assume the price of one share of ABC company is Rs. 1000 and Face Value is Rs. 20. So its dividend yield will be Dividend ÷ 1000 multiplied by 100 (20÷1000 x 100).
(20/1000) X 100
This comes to 2%.
Now let's say the price of one share of XYX company is Rs. 2000 for which the dividend is Rs. 20. So the dividend yield will be: Dividend/2000 multiplied by 100 (20/2000 x 100).
(20/1000) X 100
This comes to 1%.
So if you're holding ABC company's share, you will be getting Rs. 2 as a dividend against the market value of Rs. 100 for each share, and Rs. 1 in case of XYZ company's share. This shows that ABC company is giving more dividends than XYZ company.
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