What is a Dividend? Why is it so Important?

A Dividend is a reward that a company gives to its shareholders at regular intervals, generally from its profits. It could be in the form of Cash as Cash Dividend or in the form of shares as Share Dividend. However, it can also be in other forms like property or scrip dividends.

Why Does a Company Pay Dividend?

The answer to this is simple. To make the share of the company more attractive, to retain current investors, and to attract more investors. When a company earns a sumptuous profit, it decided to share it with the shareholders in the form of a dividend. However, whether or not to pay it depends on the company's financial health and its own discretion. The company is not legally bound to pay the dividend and it is completely at its own will.

Why are Dividends so important?

The average dividend yield for India happens to be 1.57% for BSE SENSEX. This is a very small amount. What are the benefits attached to Dividends?

  1. Some companies even offer a dividend reinvestment plan or DRIP. The DRIP allows a shareholder to reinvest the dividends back into the company buying its stocks usually at a discount or zero commission.
  2. Studies have consistently shown that dividend-paying stocks outperform non-dividend-paying stocks, during a bearish market.
  3. Dividends help protect your investment from inflation. To know more, click here.
  4. Dividends act as a great source of passive income.
  5. Depending on the amount you wish to invest tehre is a certain tax benefit involved in income eanred from dividends.

Dividend Payout Ratio.

Payout ratio = dividends per share/earnings per share × 100

Payout ratio = dividends per share/free cash flow per share × 100

Dividend payout ratio is the percentage amount of the company's earnings that is being paid out in the form of dividends. If the payout ratio is more than 100 it means that the company is paying more in dividends than what it is earning.

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