Basics of Stock Market 15: Benefits of owning a share-Corporate actions
When you’re buying a share, you are effectively becoming a part-owner of the company. The increase or decrease in share price will depend on the success or failure of the company. Once the company starts to perform well, its share price appreciates, and you can sell your share to get the capital gain. This is by far the primary way of making money from the share market.
Apart from the capital gains, you have additional benefits as well. Since you have become part-owner of the company, you are entitled to have all the corporate actions like dividends, bonus issues, etc. We’ll talk about this in the below section.
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What is a dividend?
Suppose the company you have invested in is doing really well. The company decided to distribute a part of its profits or surplus to its loyal shareholders. This distribution is called dividends. Any amount not distributed is taken to be re-invested in the business called retained earnings.
A corporation is usually prohibited from paying a dividend out of its capital. The distribution of dividends to its shareholders may be in cash which is usually a deposit into a bank account. The dividend received by a shareholder is the income of the shareholder and may be subject to income tax.
Types of dividends
Cash dividends: The most common type of dividend. Companies generally pay these in cash directly into the shareholder's brokerage account.
Stock dividends: Instead of paying cash, corporations can also pay investors with additional shares of stock.
Dividend reinvestment programs (DRIPs): Investors in DRIPs are able to reinvest any dividends received back into the company's stock, often at a discount.
Special dividends: A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need.
Preferred dividends: Pay-outs are issued to owners of preferred stock. Preferred stock is a type of stock that functions less like a stock and more like a bond. Dividends are usually paid quarterly, but dividends on preferred stock are generally fixed.
The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend.
Corporations often report their dividend yield, which is a measure of the company’s annual dividend divided by the stock price on a certain date.
The dividend yield allows for a more accurate comparison of dividend stocks. A ₹10 stock paying ₹0.10 quarterly (₹0.40 per share annually) has the same yield as a ₹100 stock paying ₹1 quarterly (₹4 annually). The yield is 4% in both cases.
The company publishes its dividend yield, which is in a percentage value. This percentage is calculated from its face value. Suppose TCS is paying a dividend of 700% and TCS has a face value of 1. This means TCS is paying ₹7 per share as a dividend. Please note that a TCS share is worth ₹3000+ while the dividend they provide is just ₹7 per share. So, never buy a share just for the dividend.
Another way a company publishes its dividend is directly through dividend value per share called cash dividend. From the above example, TCS will publish a dividend pay-out of ₹7 per equity share.