Dividend Payout

A dividend is the distribution of some of a company’s earnings to a class of its shareholders. It is basically referred to as a reward for investing in the company’s equity. The amount that is returned by the company to the shareholders as opposed to the amount that is kept for reinvestment is given by its dividend payout ratio. 

Although Cash Dividends are the most common, dividends can also be issued as shares of stock or other property. Along with companies, various mutual funds and exchange-traded funds (ETF) also pay dividends. 

A dividend is a token reward paid to the shareholders for their investment in a company’s equity, and it usually originates from the company’s net profits. At times, companies may still make dividend payments even when they don’t make suitable profits. They may do so to maintain their track record of making regular dividend payments.

There are following four types of dividends:

Cash Dividend	Stock Dividend	Property Dividend	Scrip Dividend
It is the most popular and common form of dividend payout. The company deposits the dividend money into the bank account of the shareholder as per their stock holdings.	When the company issues additional shares to its common shareholders without any consideration and issues less than 25% of the previously issued stocks, then the dividend is a stock dividend.	It is a non-monetary dividend and its issue  is recorded against the current market price of the asset under consideration. The market price of the asset can be either higher or lower than the book value.	Where the company does not have enough dividend, it may pay dividends by issuing the promissory note. The promissory note indicates to pay dividends at a later date

Dividend Payout Ratio (DPR) is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations. In other words, the dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends. 

There are several formulas for calculating DPR. But the most common used it:

DPR = Dividends paid / Net earnings

The other commonly used formulas are:

• DPR = Dividends per share / Earnings per share
• DPR = 1 – Retention ratio (the retention ratio, which measures the percentage of net income that is kept by the company as retained earnings, is the opposite, or inverse, of the dividend payout ratio)

Let us understand this with the help of an illustration:

Company XYZ has paid out Rs. 10 lakh as dividend to its common shareholders on 1st April 2021, according to its cash flow statement. Furthermore, according to its Profit & Loss Statement, Company XYZ has realised a net income of Rs.1 crore in the present financial year. Therefore, DPR or Dividend Payout Ratio of Company XYZ = (10,00,000 / 1,00,00,000)  = 0.1 or 10%

The dividend yield is the rate of return on stocks as compared to DPR, which is the percentage of net income paid out as dividends. The dividend payout ratio is more commonly used as a measure of dividend as it signifies a company’s ability to pay dividends and also portrays its priorities.

An example of Dividend Yield:

A company announces Rs.10 per share as a dividend when the market price of that share is Rs.50. In that case, the dividend yield would be 20%. 

An example of Dividend Payout:

A company pays out Rs. 10 lakh as dividends in a year when it realizes a net income of Rs.1 crore. Here, its DPR would be 10%.

The dividend payout ratio helps investors determine which companies align best with their investment goals. When shareholders invest in a company, return on their investment comes from two sources: dividends and capital gains. The two sources of return are related as follows:

• A high DPR means that the company is reinvesting less money back into its business, while paying out relatively more of its earnings in the form of dividends. Such companies tend to attract income investors who prefer the assurance of a steady stream of income to a high potential for growth in share price
• A low DPR means that the company is reinvesting more money back into expanding its business. By virtue of investing in business growth, the company will likely be able to generate higher levels of capital gains for investors in the future

The dividend payout ratio is not intended to assess whether a company is a “good” or “bad” investment. Rather, it is used to help investors identify what type of returns – dividend income vs. capital gains – a company is more likely to offer the investor. 

How often do dividends payout?

Most companies pay dividends every quarter (four times a year). They often pay upon declaring their quarterly account. However, dividend payout frequency may vary from company to company. Some companies may pay every six months (semi-annually) or annually or no set schedule (irregular dividends).

What is the date of record?

The date of record is the date on which the company reviews and determines who the shareholders are. An investor has to be the ‘holder of record’ to be eligible to receive a dividend payout. The shareholder on or before the ex-dividend date will receive the dividend.

What is a dividend payout policy?

A company’s dividend payout policy is the decision about the distribution of the company’s profits to its shareholders. A dividend payout policy of a firm is a financial decision that involves decisions on dividend payout ratio, and the frequency of dividends.

What is an annual dividend?

The total value of dividends paid by a company to investors in a year is the annual dividend. In other words, the annual dividend is an indicator of per share or aggregate of dividends paid to the shareholders during a year. The annual dividend per share, divided by the share price determines the dividend yield.

What does the payout ratio tell you?

The payout ratio is a key financial metric used to determine the sustainability of a company’s dividend payment program. It is the amount of dividends paid to shareholders relative to the total net income of a company. 

Why are dividends important?

While dividends can signal that a company has stable cash flow and is good at generating profits, they can also provide recurring revenue to investors. Dividend payouts may also help provide insight into a company’s intrinsic value.