What Is a Dividend?
A dividend is a share of a company’s profits given to its shareholders as a reward for their investment in the company.
When a company makes profits, it can either reinvest those profits into the business or share some of them with investors as dividends.
In simple terms, a dividend is the company’s way of expressing gratitude to its shareholders for their trust and investment.
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How Dividends Work?
Dividends are typically announced by the company’s board of directors and must be approved by shareholders. Once announced, the company pays dividends on a specific record date and payment date.
Dividends are usually paid by well-established, financially stable companies that consistently generate profits — such as Infosys, TCS, HDFC Bank, or ITC in India.
Example:
If a company declares a ₹10 dividend per share and you own 100 shares, you will receive ₹1,000 as a dividend.
Example of Dividend in India
Let’s consider ITC Ltd., a company in India known for consistently paying dividends.
Dividend per share (FY 2024): ₹7.50
Shareholding: 1,000 shares
Total Dividend Received: ₹7,500
This indicates that in addition to any increase in ITC’s share price, the investor receives ₹7,500 in cash dividends — a reliable source of extra income.
Types of Dividends in the Stock Market
When companies make profits, they can distribute some of those profits to their shareholders as dividends.
However, not all dividends are identical — companies choose different types of dividends based on their financial health, objectives, and what investors expect.
Let’s explore the main types of dividends in the stock market.
1. Cash Dividend
A cash dividend is the most typical type of dividend.
The company pays shareholders in cash, which is directly deposited into their bank accounts.
It offers immediate income and is favoured by long-term investors.
Example:
If a company announces a ₹10 cash dividend per share and you own 200 shares, you will get ₹2,000 in your account.
Key Point: Cash dividends are perfect for investors looking for consistent passive income.
2. Stock Dividend
A stock dividend means the company rewards its shareholders by issuing additional shares instead of cash.
This increases the total number of shares you own, but the share price typically adjusts accordingly.
It allows companies to conserve cash while still rewarding investors.
Example:
If a company declares a 10% stock dividend and you have 100 shares, you will receive 10 additional shares.
Key Point: Stock dividends boost shareholding but do not provide immediate cash income.
3. Interim Dividend
An interim dividend is announced before the financial year ends, usually after quarterly or half-yearly results.
It suggests that the company is performing well and has steady profits.
Final approval usually occurs at the end of the year.
Example:
If a company declares a ₹5 interim dividend mid-year and a ₹10 final dividend later, the total annual dividend will be ₹15.
Key Point: Interim dividends reflect a company’s strong short-term performance.
4. Final Dividend
A final dividend is announced after the end of the financial year, following the audit of the company’s accounts.
It signifies the primary profit distribution for that year.
It needs approval from shareholders at the Annual General Meeting (AGM).
Example:
The company declares ₹12 per share as a final dividend after the financial statements for the year are completed.
Key Point: Final dividends indicate a company’s overall performance for the year.
5. Special Dividend
A special dividend is a one-time payment made when a company experiences exceptionally high profits or sells a significant asset.
It is not included in the company’s regular dividend policy.
It is often viewed as a bonus for shareholders.
Example:
If a company sells a portion of its business and announces a ₹20 special dividend, it is a one-time occurrence.
Key Point: Special dividends demonstrate financial strength or extraordinary profits.
6. Property Dividend
A property dividend occurs when a company distributes physical assets or non-cash investments (such as products, real estate, or shares of other companies) instead of cash.
This type of dividend is rarely utilized in today’s markets.
It typically happens when a company has limited cash but possesses surplus assets.
Key Point: Property dividends are non-cash rewards given under special conditions.
7. Scrip Dividend
A scrip dividend (also known as a bonus issue) takes place when a company issues promissory notes or IOUs to shareholders, promising to pay dividends later.
This occurs when the company wishes to postpone payment while still recognizing its obligation.
Key Point: Scrip dividends serve as temporary solutions when cash flow is constrained.
Summary Table: Types of Dividends
| Type of Dividend | Reward Type | Common Among | Key Benefit |
|---|---|---|---|
| Cash Dividend | Cash | Established companies | Steady income |
| Stock Dividend | Extra shares | Growth companies | Increases shareholding |
| Interim Dividend | Cash | Profitable companies | Early profit sharing |
| Final Dividend | Cash | Stable companies | Annual reward |
| Special Dividend | Cash/Bonus | One-time profit events | Extra reward |
| Property Dividend | Assets | Rare | Non-cash benefit |
| Scrip Dividend | Promissory note | Cash-tight companies | Deferred payment |
Benefits of Dividends for Investors
Dividends are not just extra money — they indicate a company’s financial strength and provide a reliable income for investors.
For many, stocks that pay dividends are crucial for building wealth over the long term.
Let’s look at the main advantages of dividends that make them appealing to investors
1. Regular and Stable Income
Dividends offer a regular income stream, typically paid out quarterly or annually.
This makes them perfect for retirees, cautious investors, or anyone seeking passive income without needing to sell shares.
Key Point: Dividends provide cash flow from your investments, even in stagnant markets.
2. Indicator of Financial Health
Consistent dividend payments show a company’s ongoing profitability and solid financial condition.
Firms that keep or raise dividends over time demonstrate management confidence and business stability.
Key Point: A reliable dividend history fosters investor trust and long-term credibility.
3. Opportunity for Wealth Growth
Reinvesting dividends through a Dividend Reinvestment Plan (DRIP) or by purchasing more shares allows investors to increase their returns.
Over time, this can lead to significant growth in their portfolio.
Key Point: Reinvested dividends can greatly enhance long-term wealth.
4. Lower Portfolio Risk
Stocks that pay dividends tend to be less volatile than those that do not.
Even in market declines, investors still receive returns through dividends, which lowers overall risk.
Key Point: Dividends serve as a safety net during market changes.
Encourages Long-Term Investing
5. Promotes Long-Term Investing
Investors who prioritize dividend income usually keep their investments for a longer time, gaining from both capital growth and steady pay-outs.
Key Point: Dividends encourage patience and discipline, which are essential qualities of successful investors.
6. Protection Against Inflation
Companies that regularly increase their dividends assist investors in combating inflation.
Increasing dividend income helps maintain your purchasing power even as prices go up.
Key Point: Increasing dividends offer growth that adjusts for inflation.
Key Dividend Terms You Should Know
| Term | Meaning |
|---|---|
| Dividend Yield | The annual dividend divided by the current share price (in %). This indicates the return from dividends. |
| Record Date | The date by which you need to own shares to qualify for a dividend. |
| Ex-Dividend Date | The trading day before the record date; purchasing shares after this date means you will not receive the dividend. |
| Payout Ratio | The percentage of company profits distributed as dividends. |
Conclusion
Dividends are essential for building wealth over time in the stock market.
They provide regular income, reduce risk, and assist investors in steadily increasing their wealth.
Regardless of whether you are new to investing or have experience, selecting reliable companies that pay dividends can add stability and passive income to your investment portfolio.
Frequently Asked Questions (FAQ)
What is a dividend in the stock market?
A dividend is a portion of a company’s earnings that is shared with its shareholders as a reward for their investment. It can be given in cash or as additional shares (stock dividend).
How are dividends paid to investors?
Dividends are typically deposited directly into the bank accounts of investors that are linked to their Demat accounts. If it is a stock dividend, investors receive extra shares instead of cash.
What is the difference between cash dividend and stock dividend?
A cash dividend provides investors with money directly, while a stock dividend gives them more shares. Both types represent a portion of the company’s profits.
Who decides the dividend amount?
The board of directors of the company determines the dividend amount based on profits and future plans. Shareholders approve this during the company’s Annual General Meeting (AGM).
Do all companies pay dividends?
No. Many new or growing companies choose to reinvest their profits for expansion rather than pay dividends. Established companies typically pay regular dividends.
Are dividends taxable in India?
Yes. In India, dividends are taxable in the hands of the investor. They are added to your total income and taxed according to your income tax slab.