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Dividend in stock market explained

Share market malayalam divident

DIVIDENT - FAQ 

What dividend means

Dividend is a portion of profit paid by companies to its share holders. It is a part of profit company shares with its share holders. The amount to distribute is usually determined by board of directors.
Dividend paying companies are commonly considered as stable since only profit making companies can pay dividend. But that may not be true always. Companies may not pay dividends due to various reasons. Some companies may reinvest all their profits to sustain its growth and for expansion. That is alright in case of a growing company. On the other hand a well established company with solid profits normally pays high dividends. If you hold the stocks, you will receive dividends in the form of checque or directly credited to you bank account if your mandate is registered with registrar. 

Dividend can be a good source of income for risk averse investors. You will get a fixed amount of dividend for each of the stocks held.  You may not see big capital appreciation as in the case of growth stocks. But you will get a regular income from good dividend yielding stocks. Historically, high divident paying companies normally continue to do so.  Stock selection is important here. Company and management should be trustworthy as you may keep stocks for long term for regular income. Normally big PSU government companies give good dividends. We will discuss high dividend yielding companies in another post.

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Dividend announcement date

Date on which dividend percentage is announced is called dividend announcement date.

Cum bonus

Between date of announcement of dividend and record date, shares are referred to as cum dividend. Cum dividend means with dividend. So a day before ex date will be last cum dividend date to buy, if you want to get dividend.

Record date

Record date is fixed by issuing company. Investors should own stock on record date to be eligible for dividends. All investors holding share in their demat on record date will get dividends. 
India follows T+2 settlement for delivery of shares.  So for share to be in demat, it should be bought two days before record date.

Ex dividend date

Normally ex dividend date is a day before record date. If any holidays came in between, it is adjusted accordingly. 
It addresses the issue of T+2 delivery date. Shares must be bought before ex date. Then only he will get delivery of shares in demat on record date (T+2).
If you buy share on ex dividend date, you wont get delivery on record date and thus wont get dividend. The person who sold that share will get dividend.
On ex dividend date, stock start to trade without value of next dividend.
Eg: If record date is December 20, investor has to hold that share in his/her demat account in that date. But to get delivery on 20th December, he have to buy it before two days (T+2 day settlement). So he must buy it on or before 18th December. 18th December is last cum dividend date to  buy to be eligible to get dividend. 
19th December will be ex date and buyer wont get dividend for stocks bought on ex date.

Dividend payment date or When dividend is paid

Dividend payment date is the date of actual payment of dividend. 
Interim dividends must be paid within 30 days from date of dividend announcement. In case of final dividend, the payment should happen within 30 days from the date of annual general meeting or AGM.

Book closure date

Book closure is closure of register of members for purpose of finalization of list of members for dividends.

How dividend is paid

If your bank mandate is registered with registrar, you will receive dividends in your bank account directly through NEFT. If not, you will get cheque of dividend.

Dividend distribution tax

Dividend distribution tax or DDT is tax paid by Indian companies on dividend paid to their share holders. Dividend distribution tax is 15% on gross amount of dividend. Effective amount is 20.35% after including cess and surcharge. Dividend is paid to investors after deducting this tax.
As per news reports,Government is considering some changes in these taxes to make it attractive for investors.

Tax on dividend income

Are dividend taxable in India? Many people have this doubt. Dividend income is tax free income till 10 lakhs. You will get tax exemption for dividend you receive from Indian companies. As we discussed above company already paid dividend distribution tax before paying dividend.
when dividend is taxable - If aggregate dividend income is more than 10,00,000 in an year, tax is chargeable at the rate of 10 percent in case of resident individual, HUF or firm. Tax is chargeable on dividend income only to the extend it exceeds 10 lakhs in aggregate from Indian companies.
Eg: If you receive dividend of 13 lakhs you have to pay tax of 10% of 3 lakhs ie 30,000.

Tax on dividend yield from mutual fund

Dividend distribution tax is charged on dividend distributed by mutual funds also. They are paid by company itself and not investors as explained above. Will discuss more about taxation in mutual fund in another post.

Dividend yield

Dividend yield is ratio of dividend to market value of a share. It is dividend expressed as a percentage of share price. Companies who pay large portion of their profit as dividend will have high dividend yield. 

You can read about high dividend yield companies in India here High dividend paying stocks

Equation for calculation of dividend yield is,

Dividend yield =  Dividend per share/Share price  * 100

Eg: A company with share price of 60 declares dividend of Rs.4, then dividend yield is 15%.
High dividend yielding stocks suitable for risk averse investors. They will get a high dividend income from shares. Some use it for regular income. So these stocks are sometimes called income stocks. Dividend income is tax free till a limit as we discussed above. So it is a good income source for some investors. These companies may not keep much of their profit for expansion like growth companies do.



 Only high dividend yield should not be a parameter in selecting stocks. Sometimes a falling stocks can have high dividend yield due to price fall. But it may not be a good investment. All other parameters to select a good stock including management quality should also be considered here in stocks selection. Government policies also can affect dividend income.

How dividend is calculated

Normally dividend is calculated on face value of stocks. In India face value ranges from 1 to 10. When company announce a dividend in a fixed percentage, it is percentage of face value and not market price of that stock

Eg: If a company with face value 10 and market price 500 declares a dividend of 20% , it is Rs.2 ie 10% of face value and not Rs.100. 

Please comment if you like to discuss any other things related to this. You can also start an free demat account for investment with upstox and fyers with links below. In fyers annual maintenance charge is also free. So you can make a portfolio for long term investment and forget it. You can also invest based on various themes in thematic investment by fyers if you don't know how to research in depth about companies.


You can watch our youtube channel share market malayalam's video about dividend below.

Check out our share market malayalam youtube page for more share market related videos in Malayalam

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