what is dividend yield
It is a financial ratio that indicates what percentage of a company’s annual dividend per share is relative to the current market price of the share. In simple terms, it represents the income received from dividends in proportion to the share price.
Formula:
Dividend Yield = (Annual Dividend per Share / Current Market Price of the Share) * 100
Example:
Suppose the market price of a company’s share is ₹25, and the company declares an annual dividend of ₹2 per share.
Then, the dividend yield will be:
(₹2 / ₹25) * 100 = 8%
This means that if you invest ₹25 in this company, you will earn 8% annually on your investment as a dividend.
Importance:
Dividend yield is an important metric for investors, especially for those who are interested in long-term investments and want regular income from dividends. It helps compare the shares of different companies and understand which shares are more attractive in terms of dividends.
However, investment decisions should not be based solely on dividend yield. The company’s financial health, future prospects, and other related factors should also be considered. Sometimes, due to a fall in the share price, the dividend yield may appear abnormally high, which could be an indication of the company’s weakness.
When does a company pay dividends? Once a year?
Companies do not necessarily pay dividends only once a year. The rules or frequency of dividend payments can vary from company to company.
The most common methods are:
Quarterly: Many companies pay dividends every three months, i.e., four times a year. This is a widely followed practice.
Semi-annually: Some companies pay dividends twice a year.
Annually: There are some companies that declare and pay dividends once a year.
Monthly: Some specific types of companies, such as Real Estate Investment Trusts (REITs), pay monthly dividends. However, this is not very common.
Special Dividend: In addition to regular dividends, companies can also provide a one-time special dividend to shareholders from their excess profits. This is not regular and depends on the company’s financial condition.
The Board of Directors of the company decides on the dividend payment through a meeting and also announces the payment date.
Therefore, a company can pay dividends more than once a year, and this depends on the frequency it follows. Information regarding this can be found in the company’s financial reports or on its official website.
Should You Buy a Company's Shares After Its Dividend Announcement to Receive the Dividend?
If you want to receive a company’s declared dividend, it’s not enough to simply buy the share after the announcement. To be eligible for the dividend, you must be aware of certain key dates. The most important among them is the Ex-Dividend Date.
When a company declares a dividend, it specifies a few important dates:
Declaration Date: The date on which the company officially announces its decision to pay a dividend.
Record Date: Only those shareholders who are listed in the company’s records on this date will be eligible to receive the dividend.
Ex-Dividend Date: This is usually one or two business days before the record date. If you buy the shares on or after this date, you will not receive the declared dividend. The dividend will go to the person who sold the shares to you.
To receive the dividend, you must buy the shares before the Ex-Dividend Date and hold them in your demat account until the Record Date.Payment Date: The date on which the eligible shareholders actually receive the dividend (usually credited to their bank accounts).
In simple terms:
Just buying a share immediately after the dividend is announced does not guarantee that you will receive the dividend.
You must check the Ex-Dividend Date. To be eligible, you have to buy the share before the Ex-Dividend Date.
Example:
If a company’s Ex-Dividend Date is 15th May, you must buy the share on or before 14th May to receive the dividend.
If you buy it on or after 15th May, you won’t receive that dividend.
Is Dividend a Significant Source of Profit for Investors?
Whether dividends generate a significant profit depends on several factors. It cannot be said directly that dividends will always yield high returns, nor can it be considered a negligible source of income.
Here are some key points to consider:
Total Return:
When investing in stocks, an investor can earn income in two primary ways:
Dividends: The portion of a company’s profit distributed to shareholders.
Capital Appreciation: The increase in the market price of the share.
Dividends are just one component of your total return. Relying solely on dividends for investment decisions can sometimes lead to mistakes. Capital appreciation often represents a larger portion of profit.
Dividend Yield:
This indicates what percentage return you’re earning from dividends relative to your investment. A high dividend yield means you’re earning more in dividends relative to the share price. However, sometimes a company with a falling share price may show a high yield, which could actually be a negative sign for the company.
Company Policy:
Not all companies pay dividends. Companies focused on rapid growth often reinvest their profits into the business rather than paying dividends, or they may pay very little. On the other hand, well-established and stable companies are more likely to pay regular dividends. If your investment strategy is focused on regular income (e.g., for retirees), dividends become important.
Power of Reinvestment:
If you reinvest the dividends to buy more shares of the same or another company, your total number of shares will increase over time. This leads to greater overall returns, thanks to the power of compounding. For long-term investors, this can be a very profitable approach.
Investment Amount:
If you invest a small amount, even a high dividend yield may result in a low absolute dividend payout. But with larger investments, the dividend amount can be significantly higher.
Will I Get the Dividend If I Buy Shares After the Record Date?
No, if you buy shares of a company after the Record Date, you will not receive the declared dividend.
To be eligible for dividends, shareholders must be listed in the company’s register on a specific date called the Record Date. Simply put, the Record Date is the cutoff date set by the company to identify eligible shareholders.
When you buy shares, it takes some time for the shares to be credited to your Demat account (called the settlement cycle). Usually, shares are credited on the next trading day (T+1 day).
Considering the settlement process and the Record Date, another important date called the Ex-Dividend Date is set, which is typically one business day before the Record Date.
The rule is:
To receive dividends, you must buy the shares before the Ex-Dividend Date.
This ensures the shares will be credited to your Demat account by the Record Date, and your name will appear in the company’s shareholder register.
If you buy shares on or after the Ex-Dividend Date (including after the Record Date), your name will not be in the shareholder list on the Record Date, so you won’t be eligible for the declared dividend. Instead, the dividend will go to the person who sold you the shares.
Therefore, the Ex-Dividend Date is more important than the Record Date when it comes to dividend eligibility. You must ensure you purchase shares before the Ex-Dividend Date to receive the dividend.
