Evaluating dividends
BL RESEARCH BUREAU
August 27, 2011:
It is seen as a sign of a company's financial health and prosperity.
It keeps your cash flows steady when the market tanks. Dividends are
the portion of the profit that companies share with the shareholders.
This week we highlight the ‘dividend' aspect of investing in
companies.
India Inc is not a big pay master when it comes to dividend. The
dividend yield for the Nifty basket, for instance, is only 1 per cent.
That is, for every rupee you invest in the Nifty stocks you only get
one paise back as dividends each year.
Dividend yielding companies
However, even if the market as a whole isn't very lucrative for a
dividend-seeking investor, there are quite a few companies that offer
high dividends. ONGC, TCS and Bajaj Auto are some companies that have
consistently given away high dividends. Like a PE ratio, a high
dividend yield is a valuation metric that allows you to choose cheap
stocks.
Some companies pay dividends semi-annually (called interim dividend)
and some annually.
Dividend entitlement
When a company announces a dividend after its board meeting, it sends
intimation to its shareholders. In the intimation letter sent, you
would have to keep a note of the ex-dividend and record date. An
announcement is also made to the stock exchanges. You can view this on
the exchange websites.
You will be entitled to the dividend only if you held the stock on the
record date. It is the date by which you should be in the company's
records to be eligible to receive the dividend. If you sell the stock
before the ex-dividend date, you will lose the dividend.
Dividend percentage and yield
But when it When it comes to evaluating dividends, do not get misled
by the dividend percentage. It is the yield you should be looking at.
Dividend yield is the company's annual dividend divided by the stock's
current market price. It gives you the return you could earn on the
stock (excluding capital appreciation in stock price) on the dividends
paid out by the company, provided it pays the same dividend next year
too.
That said, you will need to look at other aspects as well —
consistency of the payout, the payout ratio and the cash flows enjoyed
by the company to gauge if dividends will be sustained. Dividend
payout, which is the percentage of profit paid as dividends, if
consistent over a period of time, is a sign of steady growth. This
will also help filter out companies that declare bumper dividends in a
year on one-time gains (such as sale of investments).
Tax treatment
Dividend incomes are not taxed in the hands of the investor who
receives them; but at the point of distribution in the hands of the
companies. But, again, as the tax is paid only out of the profits of
the company, the per share earnings fall and indirectly impact the
investors. Companies pay 15 per cent of the distributable profits as
dividend distribution tax to the government
BL RESEARCH BUREAU
August 27, 2011:
It is seen as a sign of a company's financial health and prosperity.
It keeps your cash flows steady when the market tanks. Dividends are
the portion of the profit that companies share with the shareholders.
This week we highlight the ‘dividend' aspect of investing in
companies.
India Inc is not a big pay master when it comes to dividend. The
dividend yield for the Nifty basket, for instance, is only 1 per cent.
That is, for every rupee you invest in the Nifty stocks you only get
one paise back as dividends each year.
Dividend yielding companies
However, even if the market as a whole isn't very lucrative for a
dividend-seeking investor, there are quite a few companies that offer
high dividends. ONGC, TCS and Bajaj Auto are some companies that have
consistently given away high dividends. Like a PE ratio, a high
dividend yield is a valuation metric that allows you to choose cheap
stocks.
Some companies pay dividends semi-annually (called interim dividend)
and some annually.
Dividend entitlement
When a company announces a dividend after its board meeting, it sends
intimation to its shareholders. In the intimation letter sent, you
would have to keep a note of the ex-dividend and record date. An
announcement is also made to the stock exchanges. You can view this on
the exchange websites.
You will be entitled to the dividend only if you held the stock on the
record date. It is the date by which you should be in the company's
records to be eligible to receive the dividend. If you sell the stock
before the ex-dividend date, you will lose the dividend.
Dividend percentage and yield
But when it When it comes to evaluating dividends, do not get misled
by the dividend percentage. It is the yield you should be looking at.
Dividend yield is the company's annual dividend divided by the stock's
current market price. It gives you the return you could earn on the
stock (excluding capital appreciation in stock price) on the dividends
paid out by the company, provided it pays the same dividend next year
too.
That said, you will need to look at other aspects as well —
consistency of the payout, the payout ratio and the cash flows enjoyed
by the company to gauge if dividends will be sustained. Dividend
payout, which is the percentage of profit paid as dividends, if
consistent over a period of time, is a sign of steady growth. This
will also help filter out companies that declare bumper dividends in a
year on one-time gains (such as sale of investments).
Tax treatment
Dividend incomes are not taxed in the hands of the investor who
receives them; but at the point of distribution in the hands of the
companies. But, again, as the tax is paid only out of the profits of
the company, the per share earnings fall and indirectly impact the
investors. Companies pay 15 per cent of the distributable profits as
dividend distribution tax to the government
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