When you invest in a company through stocks (equities), you can potentially earn returns in two ways:
- Stock Price Appreciation: As the company grows and performs well, the market price of its stock is likely to increase. When you sell your shares at a higher price than you bought them, you earn a capital gain.
- Dividends: A dividend is a portion of a company’s profit that it distributes to its shareholders. It’s like a reward for owning a piece of the company.
Key Points about Dividends:
- Frequency: Companies typically pay dividends twice a year – an interim dividend (paid mid-year) and a final dividend (paid at the end of the financial year).
- Amount: The amount of dividend is usually expressed on a “per share” basis (e.g., Rs. 3 per share). This indicates how much of the company’s profit is being paid out to each shareholder.
- Declaration and Payment: The board of directors decides how much dividend to declare, or if any dividend will be paid at all. They consider factors like future investment needs and profitability.
Understanding Dividend Yield:
Dividend yield is a metric that helps you compare the potential income from dividends with the current stock price. It’s calculated as:
Dividend Yield = (Annual Dividend per Share) / (Current Stock Price)
For example, if a company’s share price is Rs. 360 and it pays an annual dividend of Rs. 10 per share, the dividend yield is 2.77% (10 / 360).
Historically, investors favored higher dividend yields. A high yield could suggest the stock is undervalued, while a low yield might indicate it’s overvalued. However, dividend yield is just one factor to consider when evaluating a company’s future performance.
Remember: Companies with a history of high dividends might not always be sustainable in the long run. Consider the company’s overall health and future prospects before making investment decisions.