In simple words, a dividend is a payment made by a company to its shareholders, which comes from a portion of the company’s profits. When a company earns money, it can choose to use that money to reinvest in the business or distribute it to shareholders as a dividend. Dividends are usually paid out in cash, but can also be paid in other forms such as additional shares of stock. Dividends are typically paid on a regular basis, such as quarterly or annually, and the amount paid to each shareholder is usually based on the number of shares they own.

How Is Dividend Policy Decided?

The dividend policy of a company is typically decided by its board of directors, who are responsible for managing the overall direction of the company. The board takes into consideration several factors when determining the company’s dividend policy, including:

  • Company’s financial health: The board looks at the company’s financial statements and assesses its profitability, liquidity, and solvency before making any decisions.
  • Shareholder expectations: The board also considers the expectations of the company’s shareholders regarding dividend payouts. Shareholders may prefer regular and consistent dividends, even if they are relatively small, rather than occasional larger payouts.
  • Investment opportunities: If the company has many investment opportunities, the board may choose to retain earnings for reinvestment rather than pay out dividends.
  • Legal restrictions: The board also considers any legal restrictions on dividend payouts, such as debt covenants or regulatory requirements.
  • Industry standards: The board may also consider industry standards for dividend payouts and compare the company’s dividend policy to those of its competitors.

Overall, the decision to pay dividends and the amount and frequency of those dividends is a balancing act between the needs of the company and the expectations of its shareholders.

How to Calculate Dividend Income?

Companies typically determine the amount of dividends to be paid based on the face value of their shares. It’s important to note that when a company announces a dividend of, for example, 100%, it does not mean that they will pay out 100% of the current share price. Rather, they will pay out an amount equal to the face value of the shares. However, there are exceptions to this, such as in the case of Majesco, which declared a dividend of Rs. 974 per share, exceeding even its share price.

Investors typically use the dividend payout ratio to determine the value of a company’s dividend. This is calculated by dividing the declared dividend by the net profits of the company. Companies that don’t declare any dividends will have a dividend payout ratio of 0%, which may be viewed positively by investors who see it as an indication that the company is investing in its growth. However, some investors may view a lack of dividend payouts negatively, particularly if they have invested specifically for the purpose of receiving dividends.

The retention ratio is another method of calculating dividends, which complements the dividend payout ratio. To determine the retention ratio, one would divide the retained earnings of a company by its net profits.

Using these ratios can provide insight into the financial objectives of a company. A company that declares lower dividends may be focusing on long-term goals, whereas those that pay out large dividends may be seen as having fewer plans for the future. However, this is not always the case and depends on other factors as well.

Financial Effect of Dividend

Dividends are payments made by companies to their shareholders as a distribution of profits. The financial effect of dividends can vary depending on the company and the circumstances surrounding the payment of the dividend. Here are some potential effects:

  1. Increase in shareholder income: When a company pays a dividend, shareholders receive a cash payment that can increase their income. This can be beneficial for shareholders who rely on dividend income to meet their financial goals.
  2. Decrease in company cash reserves: Paying a dividend reduces a company’s cash reserves. If a company pays out too much in dividends, it may be left with insufficient cash to fund operations, investments, or other needs.
  3. Impact on stock price: Dividend payments can have an impact on a company’s stock price. If investors view a dividend payment as a positive signal that the company is financially healthy and has a strong future outlook, the stock price may increase. On the other hand, if investors view a dividend payment as a negative signal that the company is struggling financially or has limited growth opportunities, the stock price may decrease.
  4. Potential tax implications: Dividend payments can have tax implications for both the company and the shareholders. In some cases, dividends may be taxed at a lower rate than other forms of income, which can be advantageous for shareholders. However, the tax implications can vary depending on the jurisdiction and individual circumstances.
  5. Impact on company’s future dividend policy: The decision to pay a dividend can also impact a company’s future dividend policy. If a company pays a dividend for the first time or increases its dividend payment, it may signal a commitment to continuing or growing the dividend in the future. On the other hand, if a company reduces or eliminates its dividend payment, it may signal financial challenges or a shift in priorities.

How to Identify Dividend Stocks?

The number of stocks listed on BSE exceeds 5000, which is a significant amount. Due to this, various types of shares are traded on the stock exchange.

Dividend stocks are a type of stocks that regularly distribute most of their profits to shareholders in the form of dividends. Including them in your investment portfolio is recommended, as they provide a source of passive income. Other stocks, on the other hand, can help with capital appreciation. Real Estate Investment Trusts (REITs) and publicly-owned companies with significant assets are examples of dividend stocks.

Let’s understand how to recognize these profitable investments:

  • The stock should have a dividend payout ratio of at least 50% and a dividend yield ranging from 3-6%.
  • The company must have a track record of regular dividend payments.
  • The Earning Per Share (EPS) should show consistent growth.
  • Along with dividends, the potential for capital appreciation should also be evaluated.
  • Finally, it is essential to analyse the P/E Ratio.


The dividend is a form of compensation for the shareholders who have taken the risk of investing in a company. Typically, it is paid in cash, but it may also be paid in the form of assets. The announcement of dividends is based on the face value of a share, but it can be calculated using the dividend payout ratio and retention ratio. Dividends are not considered an expense but rather an allocation of profits.

When dividends are declared, the share price initially increases and subsequently decreases proportionately. Dividend stocks are an excellent choice for your investment portfolio as they offer a source of passive income by providing significant profits as dividends on a regular basis, with a high dividend yield.

Ultimately, I want to emphasise that before making any investments, it is crucial to evaluate your investment goals and risk tolerance. Do not hastily invest in a stock based solely on appealing factors, as this can be risky. As the saying goes, “half knowledge is dangerous.”

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