A company can pay a dividend to its shareholders out of profits made by the company during the financial year. A company can also pay dividend out of its cash reserve in case of loss or not having adequate profit to pay dividend. It’s up to the management.
Dividends are paid per share basis to the shareholders. It can be paid anytime during the financial year.
If the company has paid a dividend during the financial year, maybe each quarter based on its profit, then it’s called interim dividend.
Dividend paid at the end of the financial year is called the final dividend.
In addition to interim and final dividends, a company can also decide to pay a special dividend.
For example: if a listed company XYZ limited has announced a dividend of Rs 5 per share, then for each share you will get Rs. 5. If you are holding 100 shares of XYZ limited, then your dividend will be Rs. 500 (100*5).
It’s not mandatory for companies to pay a dividend every year or quarter. There are many companies which instead of paying dividends prefer to utilize the same to fund their growth for a better future.
The date on which a company announces and approves the dividend payment is known as Dividend declaration date or announcement date.
On the declaration date the company also decides the record date. This is the date when a company decides to review the shareholders register to get a list of all the eligible shareholders for the payment of dividend.
If your name is not in the list of shareholders, then you will not be eligible for dividend.
To get eligible, you must make sure that as on record date, shares are credited to your demat account. In this regard, understanding the settlement cycle that works in India might help you.
In India, stocks are delivered to the buyer’s Demat account after 2 trading days from the transaction date, which is known as T+2 settlement period.
Therefore, in order to be entitled to receive a dividend, you need to make sure that you buy the shares before the T+2 settlement period from the record date.
In addition to the record date, the company announces a dividend payout date. It’s the day on which dividends are paid out to the shareholders.
On the ex-date the company’s stock drops to the extent of benefits paid by the company due to the corporate action announced. Ex-date is a trading day that is one day prior to the record date. Its the date on which company’s shares are traded ex-benefits.
Suppose, a listed company XYZ limited has declared a dividend of Rs. 10 per share. The company is currently trading at Rs. 350 per share. On ex-date, the stock price will drop to the extent of dividend paid. In this case, the price of XYZ limited will drop down to Rs. 340 per share as the amount paid out no longer belongs to the company.
