How Dividends Help You Earn Passive Income From the Stock Market

What are Dividends?

A dividend is the part of the profit that a company decides to give to its shareholders. Thus, when a company earns surplus profits that it doesn’t want to reinvest in its business, it distributes them in the form of dividends.

This dividend can be paid as,

• Cash - Deposited directly into the investor’s bank or brokerage account
• Stock - Additional shares issued instead of cash
• Special dividends - One-time payments during exceptionally strong financial performance

It is important to note that not all companies pay dividends. Many high-growth companies reinvest their profits back into business expansion purposes.

The ex-dividend date and record date may seem one, but technically, they are different. The ex-dividend date is the final day for purchasing a share to be eligible for a dividend. On the record date, the company checks its records to identify which shareholders are officially registered to receive the dividend.

To put it practically, to receive the dividend, you must buy the stock before the ex-dividend date, so it is in your account by the record date. As the settlement cycle is T+1 day, meaning the share delivery and you getting ownership in the company happens one day after the share is purchased. The ex-dividend date is one business day before the record date.

How Can Investors Earn Through Dividends?

To earn dividends, one must just stay invested in respective shares on the dividend record date.

You must identify the stocks that have been consistently paying dividends to its shareholders. Check out their dividend yield, which essentially tells how much dividend these stocks have yielded in the past.

Dividend yield = (Dividend paid / Share price) *100

If this ratio has been constant for a company, chances are they will continue to pay dividends in the future as well.

Tax Implications for Dividends

Since April 2020, the taxation system for dividends has changed significantly in India. Previously, companies paid dividend distribution tax (DDT) before distributing dividends to their shareholders. Now, dividends are taxable to investors.

Now, the dividend is added to your total income and taxed according to your income tax slab. Also, 10% TDS (Tax Deducted at Source) is deducted if your total dividend income in a financial year is more than ₹5,000. (If you don't provide your PAN, TDS is deducted at 20%)

Popular Dividend-Paying Stocks in India

Many established Indian companies have a strong track record of paying regular dividends. Many investors keen on receiving dividends have consistently been investing in them. Public sector companies like ONGC, Coal India and NTPC have historically offered attractive dividend yields. Private sector giants like Hindustan Unilever, ITC, TCS, and Vedanta are also known for consistent dividend payments.