Source: Tavaga

The dividend is a reward paid to an investor, often by a listed company (to its shareholders), funded from the company’s profits or reserves.

In the case of ETF investors, a dividend could range from capital gains, interest income, or earnings paid to the fund by the securities in its basket.

How is the dividend calculated?

The amount left after paying for all the operating and non-operating expenses, interest expenses, and tax can either be kept as retained earnings for further investment, or it could be paid as a dividend to the shareholders. 

Dividend Per Share (DPS) = Portion of net profit kept for distribution as dividend ➗ No. of shareholders.

What is an ideal DPS?

DPS over the no. of years helps to know how much a company is paying to its shareholders and the financial soundness of the company. There is no ideal amount of dividends. Some companies may be financially sound even after not paying a dividend as they use that amount for further investment and give back to the investors in the form of capital gains as growth leads to an increase in the share price of the company. One such example is of Reliance Industries Limited. 

What is the dividend payout ratio?

The dividend payout ratio is calculated to know how much percentage of earnings the company is paying out as a dividend.

Dividend Payout Ratio = (Dividend Per Share ➗ Earning Per Share) X 100

Difference between Interim Dividend and Final Dividend

An interim dividend is the one that is declared and paid in the middle of the financial year whereas final dividend is announced at the close of the accounting year after the preparation of final accounts by the Board of Directors (BoD)

Important dividend dates

Announcement Date

Dividends are declared by the company’s management on the announcement day, and they are distributed after getting the shareholder’s approval.

Ex-dividend date

The ex-dividend date, sometimes known as the ex-date, is the day on which dividend eligibility ends. For instance, stockholders who purchase a stock on or after the ex-date, which is Monday, May 5, will NOT be eligible to collect the dividend. Owners of the stock on Friday, May 2, or earlier are eligible for the distribution if they owned it one business day prior to the ex-date.

Record date

The company sets the record date as the cutoff date to decide whether shareholders are qualified to receive a dividend.

Payment date

On the payment day, the money gets credited into investors’ accounts.