Dividends are payments companies make to shareholders from their profits. You receive cash directly into your bank account while still owning the stock.
For example, if you own 100 shares of a company that pays a ₹5 dividend per share, you'll receive ₹500 directly into your bank account, usually every quarter or once a year.
In mutual funds, IDCW (Income Distribution cum Capital Withdrawal) distributes dividends to investors instead of reinvesting them.
Why do companies pay dividends?
Companies pay dividends when they generate more cash than needed for business operations and growth. Instead of holding excess cash, they distribute it to shareholders.
- Attract investors: Dividends provide regular income, making the stock attractive to investors seeking steady cash flow.
- Signal financial strength: Regular dividend payments indicate the company is financially healthy and confident about maintaining profitability.
- Reward shareholders: Dividends compensate investors for holding the stock and sharing the company's success.
- Efficient capital allocation: When a company lacks sufficient growth opportunities to reinvest all profits, distributing dividends is often a better use of capital than accumulating excess cash.
Fast-growing companies typically don't pay dividends because they reinvest profits into expanding the business.
Key dividend dates
- Declaration date: When the company officially announces the dividend.
- Record date: When the company checks its shareholder records to see who's eligible to receive the dividend.
- Ex-dividend date: Usually falls on the same day or one trading day before the record date. If you buy the stock on or after this date, you won't receive the upcoming dividend. On this date, the stock price drops by the dividend amount. You're not losing value. Part of your investment has been paid out to you in cash.
- Payment date: When you receive the dividend. It may take a few days or weeks after the record date.
Tracking dividends
You can check how much dividends companies in your portfolio have paid by following these steps on Kite:
- Tap on your user ID.
- Tap on Portfolio.
- Tap on the stock you want to check.
- Tap on View Dividends.
Dividend yield
This tells you how much you're earning relative to the stock's price.
Dividend Yield = (Annual Dividend Per Share ÷ Stock Price) × 100%
If a ₹500 stock pays a ₹15 annual dividend, the dividend yield is 3%. In India, most stable dividend-paying companies have yields of around 2% to 3%.
Dividend payout ratio
This shows what percentage of the company's profit is paid out as dividends.
Dividend Payout Ratio = (Total Dividends ÷ Net Income) × 100%
A payout ratio between 30% to 60% is balanced. The company shares profits while still reinvesting in growth. This varies across sectors.
Tax implications
In India, dividends are added to your total taxable income and taxed at your personal income tax rate.
If your total dividend income exceeds ₹10,000 in a financial year, the company deducts 10% TDS before paying you. This TDS is adjustable against your final tax liability when you file your Income Tax Return.
Dividends are taxed in the year they are declared, distributed, or paid by the company, whichever happens first.