Dividend

Dividend is the portion paid by the company from its profits or accumulated reserves to the shareholders of the company as part of return on the investments. It can be in the form of cash, stock or some other form, although the most common form of paying dividend remains cash. It is not mandatory for companies to declare and pay dividend.

Since dividend is paid to shareholders, they can be equity shareholders or preference shareholders. However, if there are preference shares, they have precedence over equity shares, with respect to dividend i.e. first dividend have to be paid to preference shareholders and only then dividend can be paid to equity shareholders from whatever remains. Dividend can be interim or final:

• Interim dividend is dividend paid in the middle of the financial year. It is approved by the Board of Directors and then paid to the shareholders.
• Final dividend is paid at the end of the financial year (once annual accounts are approved), declared by the Board of Directors and is only distributed after shareholder’s approval.

Thus, final dividend requires shareholder approval, whereas interim dividend does not.

A company which has excess cash reserves which is not planned to be utilised for expansion or growth is usually repaid to the shareholder’s in the form of dividend. This helps to reward the shareholders for their investment and helps the money to flow in the economy instead of funds lying idle with the company. However, in some cases, a growth company even after having huge cash reserves may plan not to pay dividends due to certain capex strategies and planned development in the company (like M&A opportunities) which will require cash to be used in future.

When companies announce dividend, they also announces a record date. Since equity shares are traded on a daily basis on the stock exchanges, they change hands every-day. Hence, who is eligible to receive the dividend? All shareholders registered with the company on the record date become eligible to receive the dividend. Shares usually require two days for settlement, and thus two trading days before the date fixed for dividend is referred to as the ex-dividend date. One day prior to ex-date is the cum-date, which is the eligibility date to receive dividend.

An example of the dividend-related dates is as under:

There are various companies which are referred to as high dividend paying companies and these companies have been following the trend since long. For example: Hero Motocorp, TCS, HPCL, BPCL, etc. Any major change in their dividend distribution trend is visibly noted by analysts and can affect the stock prices. Thus, dividend plays an important role in determining the stock price and brand recognition of a company and its stock. Also, public sector undertakings (PSUs) have high dividend yields as government handsomely rewards itself with dividends on its investments in these firms.