What is a Dividend?
A dividend is a portion of a company's profits paid to its shareholders. When a company earns a profit, it can either reinvest it (retained earnings) or distribute part of it to shareholders as dividends. Dividends are declared by the board of directors and approved by shareholders at the AGM or through board resolutions.
In India, dividends are paid in cash and credited directly to your bank account linked to your demat account (via ECS/NEFT). No action is required from investors — you simply need to hold the shares before the ex-dividend date.
Interim vs Final Dividend
- Interim Dividend: Paid during the financial year, before the annual accounts are finalised. Declared by the board without shareholder approval. Common in Q2 or Q3.
- Final Dividend: Declared at the end of the financial year, approved at the AGM. Legally requires shareholder resolution.
Key Dates You Must Know
- Declaration Date: Date the board announces the dividend amount.
- Record Date: The cut-off date — you must hold shares in your demat account on this date to receive the dividend.
- Ex-Dividend Date: One trading day before the record date (T+1 settlement). If you buy shares on or after the ex-date, you will not receive the current dividend. The share price typically drops by approximately the dividend amount on the ex-date.
- Payment Date: Dividend is credited to your account. SEBI mandates payment within 30 days of the record date.
Dividend Yield
Dividend Yield measures the annual dividend relative to the current share price:
- Dividend Yield = Annual Dividend Per Share / Current Share Price × 100
Example: If a company pays ₹20 annual dividend and the share trades at ₹500, yield = 4%. PSU companies (Coal India, Power Finance Corp) often yield 5–8%, making them attractive for income investors.
Dividend Payout Ratio
Payout ratio = Dividends Paid / Net Profit. A payout ratio of 40% means the company distributes 40% of profit as dividends and retains 60% for reinvestment. High-payout companies (70%+) include many PSUs and mature cash-generative businesses. Growth companies typically have low or zero payout.
Dividend Taxation in India (Post April 2020)
Since FY2020-21, dividends are taxable in the hands of the investor at the applicable income tax slab rate. TDS of 10% is deducted at source if dividends exceed ₹5,000 in a financial year. High-income investors (30% bracket) pay effectively 30% on dividends. This reduced the attractiveness of high-dividend stocks for HNIs compared to earlier when dividends were tax-free.
Special Dividends and Buybacks
Companies sometimes declare special one-time dividends from accumulated reserves or asset sales. Alternatively, companies prefer buybacks (repurchasing own shares) over dividends because buyback is taxed at a lower rate for companies and was previously tax-efficient for investors. Post-2024 budget changes, buyback tax has been shifted to investors — making dividends and buybacks more comparable from a tax perspective.