What is a Dividend? Meaning, Key Dates, and Types Explained

We know that one should invest a portion of their income in the securities market. But did you know that there’s a way to earn money while being invested? 

Today, we’re going to walk you through a unique way to earn passively. We’ll cover what a dividend is, the most important dates you’ll need to know as an investor and the types of dividends that a company can pay.

Meaning Of Dividend

In simple terms, a dividend is a payment by a corporation to its shareholders, which is commonly realized through the company’s profits. When a company earns a profit, it can choose to either reinvest the money back into the business (retained earnings) or distribute a portion of it to shareholders in the form of a dividend. Dividends are a way for companies to reward shareholders for their investment and provide a steady stream of income.

Therefore, dividends are seen as a sign of a company’s financial health and stability. Companies that consistently pay dividends, especially those that increase their dividend payout ratios over time, are often viewed as financially sound and stable. This can make dividend-paying stocks particularly attractive to income-focused investors, such as retirees, who rely on the steady income that dividends provide.

Dividend Key Dates

To fully understand the dividend process, it’s important to know the key dates involved:

Declaration Date

It is the date when the board of directors of the company declares the dividend to be paid out. It usually states how much money is to be given out and dates set for the record date and payment date. The declaration date is the first signal to investors that a dividend will be paid.

Ex-Dividend Date

This is the cutoff date established by the stock exchange. If you purchase a stock on or after this date, you will not be eligible to receive the declared dividend. For one to qualify to be paid the dividend, the person should own the share before the ex-dividend date. 

Record Date

This is the date when the company reviews its records to determine which shareholders are eligible to receive the dividend. The record date is usually one business day after the ex-dividend date. It’s the official date on which you must be on the company’s books as a shareholder to receive the dividend.

Payment Date

This is the date when the dividend is actually paid out to shareholders. In other words, it is the date when money is released and transferred to shareholders in their brokerage accounts.

Example of Dividends

Let’s say Company XYZ declares a dividend on January 1st of $2 per share:

– Declaration Date: January 1st, when the company announces it will pay a dividend of $2 per share.

– Ex-Dividend Date: January 15th. To be eligible for the dividend, you need to purchase the stock by January 14th.

– Record Date: January 16th, when the company checks its records to see who is eligible.

– Payment Date: January 31st, when eligible shareholders receive their dividends.

If you own 100 shares, you will receive a total of $200 in dividends (100 shares * $2 per share) on January 31st.

Types of Dividends

Companies can issue several types of dividends, each with its own characteristics and implications for shareholders:

Cash Dividends

This is the most common type and pays the holder in cash, either to their brokerage account or with a physical check. This is the form of the dividend that most people think about and refer to when they use the term dividend.

Stock Dividends

Instead of cash, shareholders receive additional shares of the company’s stock. In other words, this exercise allows more share ownership without giving out cash. Stock dividends are popular because they allow the holder’s interest in the business to widen without the holder spending money to earn new share rights. Thus, the company can safeguard its cash while satisfying the shareholders. 

Property Dividends

These dividends are paid out in the form of assets other than cash, such as products or physical assets owned by the company. Property dividends are rare and can include items like real estate, inventory, or other physical assets.

Special Dividends

These are one-time payments that a company issues, usually when it has accumulated substantial profits or has excess cash reserves. Special dividends are not recurring and are often larger than regular dividends, reflecting a particularly strong performance period for the company.

Preferred Dividends 

These dividends are paid to holders of preferred stock and are typically fixed amounts paid on a regular schedule, often quarterly. Preferred dividends have priority over common dividends, meaning they are paid out first. Thus making preferred shares a more predictable income source.

How can I track Dividends?

Generally, listed companies publish all the corporate announcements at stock exchanges first, i.e., NSE and BSE in India. However, it will be cumbersome for you to monitor updates from each company individually.

To simplify this process, we’ve created a dedicated corporate action page where you can effortlessly track all the latest corporate announcements, including but not limited to dividends, rights, splits, and bonus issues.

You can access the corporate actions page to get the detailed list.

But that’s not all. In addition to our corporate actions page, we recently launched our new WhatsApp service. Now, you can effortlessly stay informed about all corporate actions, including dividends, bonuses, splits, and more, delivered straight to your phone every morning by 9 A.M. for just INR 11!

Sign up now and never miss any corporate announcement.

Conclusion

Understanding dividends and their associated dates is essential for any investor seeking to benefit from this form of income. By keeping track of declarations, ex-dividends, records, and payment dates, investors can ensure they are positioned to receive dividends. 

Hence, whether you’re an amateur investor or a seasoned pro, dividends can play a valuable role in building a growing portfolio. However, you must perform your analysis before investing in any stock.

Frequently Asked Questions (FAQs)