What is dividend in stock market?

Dividend is a portion of the company’s profit that it share to its shareholders. It is a way of rewarding the shareholders for investing in the company. Dividends are usually paid in cash.

How does dividend work?

Suppose a company X earnerd Rs. 1000 profit and it has 100 shares outstanding. The company decides to pay Rs. 1 per share as dividend. So, the total dividend paid by the company will be Rs. 100 (100 shares x Rs. 1 per share). If you own 10 shares of the company X then you will receive Rs. 10 as dividend (10 shares x Rs. 1 per share). The dividend amount will be sent to your bank account. Company X paid Rs. 100 as dividend now it has Rs. 900 left with it. This Rs. 900 can be used by the company for its expansion or inventment or it can be distributed as dividend in the future.

Types of dividend

There are two types of dividend:

1. Interim dividend
2. Final dividend

Interim dividend

An interim dividend is a dividend declared before the annual general meeting or the release of the final financial statement of the company.

Final dividend

A final dividend is a dividend declared after the annual general meeting or the release of the final financial statement of the company.

How to calculate dividend yield?

Dividend yield is the ratio of dividend paid by the company to the current market price of the stock. It is expressed in percentage.

Dividend yield = (Dividend per share / Current market price of the stock) x 100

Suppose a company X paid Rs. 10 as dividend and the current market price of the stock is Rs. 100. Then the dividend yield will be 10%.

Dividend yield = (10 / 100) x 100 = 10%

Pro and cons of dividend

Pros of dividend

1. It shows that the company is making profit.
2. It helps in increasing the confidence of the investors in the company.

Cons of dividend

1. It reduces the cash available with the company for its expansion or investment.
2. It increases the tax liability of the company.

Conclusion

Although is good sign for health of a company but if company giving away all proportion of its profit as dividend then it is not good for the company. The company should retain some portion of its profit for its expansion or investment.