How Exactly Do Dividends Work?
Corporate actions are measures that a company does that change the value of its stock. There are different kinds of corporate actions that a company can take. If you understand these corporate actions well, you can get a clear picture of the company's financial health and decide if you want to buy or sell a certain stock. Dividends and How They Affect Price A company gives dividends to the people who own shares in it. Dividends are a way for a company to share the money it made during the year. Dividends are paid out based on each share. Consider the face value of a company to be Rs 10. If it declares dividends of Rs 40 per share. This means that the dividend payout is 400%. Please keep in mind that dividends are not necessarily paid out every year. If the company thinks that instead of giving dividends to shareholders, it would be better to use that money to fund a new project that will help the company in the long run, it can do that. Also, dividends don't have to be paid out of profits alone. If the company lost money during the year but has a healthy cash reserve, it can still pay dividends out of the cash reserve. During the financial year, dividends can be paid at any time. If it is paid during the financial year, it is called an interim dividend and if the payout is at the end of the FY, it is a "final dividend." Sometimes giving out dividends could be the best thing for the company to do. When the company has no more ways to grow and has extra cash, it would make sense for the company to reward its shareholders. This would be a way for the company to repay the trust that its shareholders have in the company. At the Annual General Meeting (AGM), where the company's directors meet, the decision to pay a dividend is made. Dividends are not paid out as soon as they are announced. This is because the shares are traded throughout the year, and it would be hard to tell who gets the dividend and who doesn't. Here are the important dates you should know. Date of Dividend Declaration: This is when the Annual General Meeting (AGM) takes place and the board of directors of the company approves the dividend issue. This is the date that the company decides to look at the list of shareholders to see who is eligible for the dividend. Most of the time, there are 30 days between the dividend announcement date and the record date. Ex-Date/Ex-Dividend Date: The ex-dividend date is usually set two business days before the record date. The dividend is only given to shareholders who owned the shares before the ex-dividend date. This is because normal settlement time in India is T+2. So, if you want to get a dividend, you should buy the shares before the ex-dividend date. Date of Dividend Payout: This is the date when dividends are given to shareholders who are listed in the company's register. Cum Dividend: Shared are considered cum dividend will the ex-dividend date, which means that the dividends are about to be paid. When a stock goes ex-dividend, its price usually goes down by the amount of dividends paid. For instance, if Reliance is currently trading at Rs. 2,800 and has announced a dividend of Rs. 100, on the ex-date, the price of the stock will go down by the amount of the dividend paid. In this case, the price of Reliance will go down to Rs. 2,700. The price falls because the company no longer owns the money that was paid out.