Well, if you plan to make money through dividend income, it is recommended to know few important terms about dividends.
Dividend Yield
Comparison of Dividends
It is very important to know the dividend yield so as to compare the dividends given by different companies.
| Company A | Company B | |
| Cash Dividend | Rs 5 | Rs 10 |
| Current Market Price | Rs 20 | Rs 50 |
In the above example, we may think that company B is a better investment option than company A as it is giving a higher dividend. It is important to make dividend yield analysis while making comparisons.
| Company A | Company B | |
| Dividend Yield | 25% | 20% |
It's like a return on investment. Company A fetches more yield than Company B. So Company A is a better investment option than Company B.
Face Value
Face value is very important to know as dividends are declared as per face value only.
For example, JaFor example, Jamna Auto Industries Limited recommended interim dividends amounting to INR 0.40 on each equity share paid to shareholders for the Fiscal Year 2019-20. The face value of the share is Rs1.
Here, per a share of Face value Rs.1, you get a dividend of Rs. 0.4
Dividend Payout Ratio
Dividend payout ratio means how much percentage of earnings that a company distributes to its shareholders as dividends.
Analysis of Dividend Payout Ratio:
0% to 35%: It is considered a good payout. This payout ratio is observed when a company just initiates a dividend.35% to 55%: It is considered healthy and reasonable from an investor’s point of view. This payout ratio is observed when the company is well established and a leader in its industry.
55% to 75%: It is considered high and good from an investor's point of view because the company is expected to distribute more than half of its earnings as dividends, which implies less retained earnings.
75% to 100%: It is considered very high and it increases the risk of the company cutting its dividends in the future.
More than 100%: It is considered very abnormally and try to cross-check how these dividends payments are being made. It's okay only if the company is having more accumulated profits and giving more than 100% dividends.
Negative dividend payout ratio: Sometimes, If earnings are in the red and if there are no accumulated earnings, then companies raise necessary funds just to maintain their dividend track. In that instance, it's not a good sign for the company.
Dividend Declaration Date
This is the date on which the company’s board of directors declares the dividends for the stockholders. The conference includes the date of the dividend distribution, size of the dividend, and the record date.Record Date
The date by which you must be on the company’s record books as a shareholder to receive the dividend.According to the company, you are only eligible to get the dividends, if your name is on their book till this record date.
Ex-Dividend Date
The date before which you must own the stock to be entitled to the dividend. The Ex-dividend date is set by the stock exchange and it's usually two days before the record date.In order to be able to get the dividend, you will have to purchase the stock before the ex-dividend date. If you buy the stock on or after the Ex-dividend date, then you won’t get the dividend, instead, the previous seller will get the dividend.
Payment Date
This is the date set by the company, on which the dividends deposited are paid to the stockholders. Only those stockholders who bought the stock before the Ex-dividend date are entitled to get the dividend.I hope you have understood all the terms explained above. Among all these dates, the Ex-dividend date is the most important date.
Further, if you want to know the dates of the upcoming dividends payment date, you can get it from the money control website: www.moneycontrol.com/stocks/marketinfo/dividends_declared/
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