What is Dividend in Stock Market?
Dividend is the part of the profit shared to the shareholders of a company. Dividend enables the investors to earn a passive income from their investments. The most ordinary form of dividend shared to investors for being a valuable shareholder of company is cash dividend. Profitable companies usually declare dividends on a quarterly basis. The dividend income will be credited directly to the bank account linked to the Trading and Demat account of the shareholder. The dividend yield ratio of a company interprets the profitability and financial stability of a company. It is not mandatory for a company to distribute its profit to shareholders.
A company that consistently provides dividend payouts reflects the healthy performance of the company. A company must procure capital for their operational expenses. So companies having healthy cashflow and consistent profitability are more likely to distribute their profits to shareholders. If a company does not distribute dividends, we cannot say that the company is performing worst. Most of the growth companies focus on reinvesting the surplus amount into research and expansion than dividend payout. So that the investors can earn more revenue by capital appreciation. Some of the high dividend yield stocks in the stock market are ITC, Vedanta, IOC etc.
- High dividend yield stocks are always a reliable income source for investors. when the market is in a bearish trend and there is a low probability of getting capital appreciation.
- stock dividend payouts are always appreciated by the retail investors and can improve market sentiment for a stock.
- A high dividend yield improves the valuation of a stock and is attractive for investors looking for stable returns in the stock market.
How To Earn Dividends From Stocks?
Let us understand in detail how to become eligible to earn the dividend income of a company.
Dividend Declaration Date
It is the date company announces the dividend issued by the company. The company announces the record date on the same day as the dividend declaration date.
Record date is the date announced by the company at the time of issuing dividend. Investors must hold the stock in their demat account at the time of record date to become eligible to earn dividends. For earning dividend and to become an investor of the stock, the investor must keep the stock in holdings before the Ex-dividend date.
Ex Dividend Date
Investors should hold the stock in their demat account during the Ex-dividend date to become eligible for the dividend income. Typically, the Ex-dividend date occurs two days before the record date.
Dividend Payout Date
it is the date investors get their dividend income credited in their bank account. Dividend incomes are not credited to demat account. It will be directly credited to bank account linked to the demat account of the investor.
Let us understand with an example of ITC stock. Imagine, On April 1st, 2023, ITC has announced a dividend of 2 Rs along with Record date on may10. So usually, the Ex-dividend date will be on May 8. So, the investors who have ITC stock in their demat holding on the 8th may be eligible to earn dividend income.
What is the percentage of tax on the dividends in India ?
Dividend was tax free for shareholders till March 31st, 2020. Dividend distribution tax (DDT) of 15% was levied by companies before dividend payments. From April 1st, 2020, DDT is not levied by companies. The holders must add dividends to other incomes to find the total income which is taxable as per the slab applicable to them.
- Dividend incomes earned by shareholders are subject to tax payment.
- Taxation of dividend income can depend upon the tax slab of the shareholder and is subject to tax payment according to the tax bracket.
- Taxation of dividend income depends upon the tax residency of the shareholder, in case of Indian citizen, shareholder is subject to pay tax for dividend income.