Dividends in Stocks - Meaning, Payout Ratio, Types, & How to Calculate
Why do some companies give dividends to investors and what does this mean for them? Watch our informational and easy-to-understand video from the #LearnWithUpstox series and find an answer to these.
After a hard day of work, there is no better reward than a nice steaming cup of tea. But did you know that companies also give out rewards, not just to their employees but also to those who show trust and confidence in their company. This reward is called a dividend.
So today, let’s discuss dividends.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
Let’s discuss the topic of dividends, in which we are going to talk about - what exactly are dividends? Are they compulsory? And which cases can you claim them in?
So, let’s get right into it.
What is a dividend?
Dividends are a very debated topic amongst investors of all kinds. So, let’s just understand what exactly these are.
When you buy the stock of a company, you become a part owner of the company. You are a part of the prosperous future the company wishes to build for itself. Hence, you are also entitled to whatever profits it decides to redistribute as a reward for believing in its business and investing in it. This reward is termed as a dividend.
When a business reports a profit, after putting aside all its big and small expenses, and future investment plans, it gives back some amount to its shareholders. This is called a dividend.
Are dividends compulsory?
Now, is this compulsory? Of course not. Stocks don’t owe us anything. We’re not lending our money to the company when we buy its stock. So, unlike a bond, or giving a loan to someone, a company does not always have to give out dividends. Some of the biggest companies in the world, such as Amazon, Tesla or Google, haven’t paid a single dividend till date. They say that they plan to use this money as a reinvestment in the business to grow their company.
Are dividends always good for investors?
Now, is a dividend always good? That depends on your approach as an investor. If you’re an investor interested in fast growth and not fixed income, you might prefer a stock that doesn’t pay attractive dividends but grows the company faster.
From the company perspective, if a company grows fast enough, and has a good expansion potential, it can choose to give a smaller dividend or nothing at all. But sometimes, companies are cash-rich and have met their expansion needs. In such cases, giving a dividend is affordable and sustainable.
But what if a company announces a huge dividend?
Do you know that at times, companies pay really big dividends when they shut down. Majesco is an example of that. Since the owners were selling off the U.S. Division of the company, they declared a dividend of Rs. 974, when the share’s price was only Rs. 900-950. And if you know anything about dividends, you would know that the average dividend yield in India is just 1.57%. This means that the percentage taken when a dividend on a stock is divided by its price, comes down to 1.57%, which isn’t a lot.
That’s it for now. Thank you so much for watching our video on dividends, in our series, Learn with Upstox. I hope you learned something today.
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