What is Dividend? Passive source of Income

June 28, 2022
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Story of a Dividend Text Message.

Imagine, You just woke up in the morning and checked your phone.

Your Account, XXXXXX6843 has been credited with INR40,012/-

Do you want this kind of message once a month?

It is Passive for which you are not working.

After this article, you will come to know about dividend meaning

a tax-deductible distribution made to shareholders out of current or retained earnings of a firm by the board of directors, often every quarter. A firm pays its shareholders a dividend, a portion of each share’s face value, out of its yearly profits. Even if steady businesses are not growing substantially, dividends offer a reason to own ownership in them. Dividend payments are not obligatory for businesses. Companies that pay dividends often have moved past the growth phase and find that they no longer receive sufficient returns from reinvesting their earnings, so they instead opt to distribute those earnings to their shareholders.

Introduction: Dividend

In layman’s terms, a corporation pays a dividend when it distributes a portion of its profits to its stockholders. Dividends are a tax-free source of income because there is often no tax on income beyond Rs10,00,000. A firm is not required to pay dividends. Even though a corporation consistently distributes dividends, there is no guarantee that it will continue to do so in the future. The board of directors of the corporation decides whether or not to pay dividends to shareholders. Small businesses seldom pay dividends because they often believe that profits should be used for business expansion and growth.

Understand Face value for dividend

In essence, each share has a market value and a face value. Market value is the price at which a share was last exchanged, which refers to the price at which it is now traded. Share market value fluctuates as a result of supply and demand. Every business has a face value, which is the notional worth that is printed on the front of the book. Alternatively, we may say that this represents the original share price paid by the company’s promoter.

Now it is important for you to understand the concept of face value because the management of a company announces dividend based on the face value. This value also become important since other big decisions are also taken taking face value as the base such as stock split. The face value doesn’t change just like market value changes. The difference between the face value and market value is negligible.

In AGM of ABC Ltd.

Director: we are giving a 200% dividend.

This means whatever the face value of the company is, they are going to pay 200% of face value.

Important metric to compare dividend companies

Dividend yield informs us of the dividend being paid relative to the market value. To compare the businesses that pay dividends, we also utilize dividend yield. Assume there are two businesses. ITC and BPCL are the two, and each is paying a dividend of Rs. 10 per share. Now are able to distinguish which is more beneficial ?

itc dividend or bpcl dividend.

Dividend yield informs us of the dividend being paid relative to the market value. To compare the businesses that pay dividends, we also utilise dividend yield. Assume there are two businesses. ITC and BPCL are the two, and each is paying a dividend of Rs. 10 per share.

So By using the mathematical expression of dividend yield we can find out who is giving more dividend.

Dividend yield = Dividend/Market Price

so dividend yield of itc will come 10/200 is 0.05 and dividend yield of bpcl will come 10/400 is 0.025 which is less than 0.05.

So ITC is offering more dividend than BPCL.

What can be done with dividend money?

After a dividend is declared, stock prices can decline. The majority of businesses don’t pay dividends. The shareholders of Berkshire Hathaway do not receive dividend payments. Mr. Warren Buffet, a renowned investor, is the owner of this business. He believes that dividend money should be invested in the development and growth of the firm, therefore he does the same with his own. Development of new products, acquiring competitors, investing in technology, and purchasing quality businesses are all examples of expansion and growth. If a firm is growing and performing well, it will have a direct, positive influence on the share price. Warren uncle likes investing money back into the company. He has made investments in various firms that consistently pay dividends in the meantime.

Final Words

Now! You must be curious to know about upcoming dividend companies.

Investors that want the additional income frequently choose dividend-paying companies to those that don’t. Nothing is wrong with it. You’ll receive a text message from your bank on your phone that makes you happy.

We hope We gave you some insights about dividend and you are cleared through what is dividend

Let us know what you think about dividend. leave a comment, and We will respond to it.

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To your Investing Journey

Cheers

Rupay Rajat

Rupay Rajat is a financial and investing blog. I write about financial instruments and the stock market in the most easiest language.