Everything You need to know about Dividend

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Introduction

dividend is a special payment a company gives to the shareholders who own its shares. This payment can be in the form of money or shares. It is a way for the company to share its earnings or profits with the shareholders. The company’s board of directors, a group of important decision-makers, decides when to give dividends. Usually, they do it regularly, like every few months or once a year. The dividend amount depends on how well the company is doing financially and some other rules they have.

 It is especially attractive to income-seeking investors who rely on the reliable earnings source offered by dividend payments. But not all companies give dividends. Some companies, especially those still new or growing, might use their earnings to make the company even better instead of giving dividends. They want to use the money to help the company grow and be successful in the long run. 

Example of Dividend

Let’s say you own shares of a company called XYZ Corporation. XYZ Corporation is a profitable company that decides to share some of its profits with its shareholders through dividends. The company announces a dividend of NPR 200 per share.

If you own 1000 units of shares of XYZ Corporation, you would be entitled to receive a dividend payment of NPR200 per share. To calculate the total dividend amount you will receive, multiply the dividend per share (NPR200) by the number of shares you own (1000). In this case, your dividend payment would be NPR200000.

Dividend in the Context of Nepal

1) Dividends are usually distributed to shareholders within forty-five days after the decision to provide them unless certain circumstances arise:

(a) If there is a law that prohibits the distribution of dividends.

(b) If there is a dispute regarding the right to receive dividends.

(c) If the dividends cannot be distributed within the specified time limit due to reasons beyond the company’s control or any other unforeseen circumstances.

2) If the Government of Nepal fully or partially owns a company, it can only distribute dividends after obtaining prior approval from the Government of Nepal. The government may also provide necessary instructions regarding the distribution of dividends by such companies.

3) If a company fails to distribute dividends within the specified time limit mentioned in point 1, it must distribute the dividends along with interest, as prescribed by the regulations.

4) The person whose name is recorded in the shareholder register when the dividend is declared, or their legal heir is entitled to receive the dividend.

5) A company can only pay or distribute dividends from the profits set aside for dividend distribution.

6) Before paying or declaring a dividend from the profits of any financial year, a company must deduct pre-operational expenses, depreciation as per the accounting standards set by the competent authority, any mandatory payments or reserves required by the law, or any accumulated losses from previous financial years.

However, the law requires the establishment of a reserve or consolidated fund before distributing dividends. In that case, any company bound by such legal requirements can only distribute dividends after establishing such reserve or fund first.

7) Subject to the provisions mentioned in this section, the board of directors of a company may distribute interim dividends from the profits of the previous financial year under the following circumstances:

(a) If the company’s articles of association include a provision for the distribution of interim dividends.

(b) If the annual financial statement for the relevant financial year, from which the interim dividend is to be distributed, has already been certified by the auditor and approved by the board of directors.

8) A company cannot pay or distribute any amount of cash or kind from its funds to its shareholders unless it is a dividend approved by the general meeting.

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9) Any dividend amount that remains unclaimed or uncollected by a shareholder even after five years from the date of the company’s resolution to distribute dividends in its general meeting will be credited to the investor protection fund established under Section 183.

10) Before the expiry of the mentioned period in point 9, the company must publish a notice in a national daily newspaper inviting concerned individuals to claim the dividend within a time limit of at least one month.

11) A company must transfer the dividends to its shareholders, as approved in the general meeting, to a separate account within forty-five days. The company must use this account solely to distribute dividends and cannot utilize the funds for any other reason.

Benefits of Distributing Dividends:

Giving dividends can be beneficial for companies and their shareholders in several ways. Here are some important benefits of distributing dividends:

Rewarding Shareholders: 

Dividends are like special rewards companies give to those who own their shares. It’s a way for the company to thank the shareholders for investing in the company. Shareholders receive a direct financial benefit from dividends.

Attracting Investors: 

Dividends can make a company more attractive to potential investors. Some investors like to invest in companies that pay dividends regularly. When a company offers dividends, it can attract more investors to buy its shares.

Building Shareholder Loyalty: 

Regular dividend payments can help build loyalty among long-term shareholders. When shareholders receive dividends regularly, they feel happy and may want to keep their shares longer. This loyalty can make the company’s shareholders stable and strong.

Positive Reputation: 

Companies that consistently pay dividends can have a good reputation in the market and among investors. Paying dividends can show that the company is doing well financially and has enough money to share with its shareholders. This positive reputation can attract more investors to the company.

Reinvesting in the Company: 

Dividends give shareholders a choice to use the money to buy more shares in the company helps the company because it increases the number of shares and the value of the company in the market. It can make the company stronger financially.

Using Money Wisely: 

Distributing dividends is a way for companies to use their extra money in a smart way. Instead of keeping all the profits, they share it with the shareholders. This way, the money goes to good use either by the shareholders or by investing in other opportunities.

It’s important to remember that not all companies give dividends. Some companies, especially those wanting to grow quickly, may use their profits for other purposes. They may want to invest in new projects or expand their business instead of giving dividends to shareholders.

Types of Dividend

Companies can distribute different types of dividends to their shareholders. Here are some types of dividends that you should know:

Cash Dividend: 

When a company gives its shareholders money as a dividend, shareholders receive the cash directly in their bank accounts or through checks.

Stock Dividend:

 Instead of giving money, a company may give its shareholders more shares of the company’s stock means shareholders own more of the company without paying extra.

Property Dividend: 

In special cases, a company might give its shareholders things like equipment, buildings, or other valuable things instead of money. It’s like receiving a useful item as a dividend.

Special Dividend: 

Occasionally, a company may give an extra dividend on top of the regular dividends, which happens when the company has made a lot of profit or has extra money to share.

Liquidating Dividend: 

When a company is closing down or ending its operations, it may give back some of the money to the shareholders as a cash dividend. It’s like returning a part of the money they invested.

How do dividends work?

Here is step to step process on how a dividend works.

  1. The company makes money and keeps some of it as profits.
  2. The management team decides to give some of the profits to the shareholders as dividends instead of using it all for other purposes.
  3. The company’s Board of Directors approves the decision to pay a dividend.
  4. The company announces the dividend to the shareholders, including the amount of money they will receive per share, the date when it will be paid, and the record date (a specific date by which shareholders must be registered to receive the dividend).
  5. On the payable date, the company distributes the dividend to its shareholders. Each shareholder receives their dividend portion based on the number of shares they own.
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Why do Some Companies choose to Issue Dividends to Shareholders?

Companies choose to pay dividends for several reasons. First, it is a way for companies to reward their shareholders for investing in the company. By sharing a portion of the profits, companies show appreciation to their shareholders and give them money in return. Paying dividends can attract investors who want to receive regular income from their investments which is especially important for people who rely on investment income for their daily needs. Companies that pay dividends are often seen as financially stable and successful, which can attract more investors.

 Dividends encourage long-term investment because shareholders receive an ongoing financial benefit, which makes them want to hold onto their shares. Fifth, some companies may be lawfully required to pay dividends, while others have policies that ensure regular dividend payments. Also, paying dividends allows companies to manage their excess cash effectively and avoid accumulating too much money. It may have tax advantages for both the company and its shareholders. However, not all companies pay dividends, especially those focusing on growth and expansion. The decision to pay dividends depends on the company’s financial health, growth prospects, and the preferences of its board of directors.

Why do some companies not choose to issue Dividends to shareholders?

Not all companies choose to pay dividends to their shareholders. There are different reasons for this. Some companies need to make more profit and use all their money to grow and become profitable. They want to invest in their business to make it bigger and better. Other companies are already making profits, but they believe using the money for growth is more important than giving it back to the shareholders as dividends.

Companies that don’t pay dividends can still be good investment options. Some companies are rapidly growing, and their stock prices can go up a lot. Investors can make money by selling their shares at a higher price, which is called capital gains, instead of getting regular dividend payments. These companies can give investors bigger returns than companies that pay dividends. So, not getting dividends doesn’t mean the company is not a good investment choice. It depends on the company’s growth and the potential to make more money when selling the shares.

Dividend Key Dates

Dividends have some important dates that investors should know:

Dividend Dates

Declaration Date: 

The Declaration date is when the company’s board of directors announces the upcoming dividend. They declare the amount of the dividend and the date when they will pay it, which is an important date because it marks everyone about the dividend announcement.

Ex-Dividend Date: 

The ex-dividend date is when the stock begins trading without the dividend. The investor won’t get the upcoming dividend if someone buys the stock on or after this date. This date is usually a few days before the record date to give time for the stock to be settled.

Record Date: 

The record date is when a shareholder must be on the company’s books as a registered shareholder to be eligible to receive the dividend. Investors listed as shareholders on the record date will receive the dividend payment.

Payment Date: 

The payment date is when the company gives the dividend to the shareholders. They transfer the money to the shareholders’ accounts or give them physical dividend cheques.

Investors need to remember these dates to know when to get the dividend. Companies may have different dividend schedules, so checking their announcements or asking a financial advisor for more information is good.

Why do people invest in dividend stocks?

People invest in dividend stocks for several reasons. Dividend stocks provide investors with a regular income. They receive payments from companies they invest in, which is especially helpful for people who need a steady income, like retirees. Dividend stocks are seen as stable and reliable because the companies that pay dividends are usually financially healthy, making investors less risky than other stocks. It can also grow in value over time, providing investors with income and the potential for their investment to increase in worth.

 Reinvesting dividends can help investors build wealth over the long term. By using the dividend payments to buy more shares, they can increase their investment. Dividend stocks can be part of a diversified investment portfolio, which means spreading investments across different types of stocks to manage risk. Some investors focus on “dividend aristocrats,” companies that consistently increase their dividends yearly. Investing in these companies offers a combination of income, stability, and the potential for future dividend growth. However, it’s important to consider the risks and consult with a financial advisor before making investment decisions.

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How much do companies pay out in dividends?

The amount of money companies pay in dividends can differ for each company. A few things can affect how much a company pays in dividends. First, the company needs to make a profit. If the company is making money, it can use some of that money to pay dividends to its shareholders. Then, the company needs to be in good financial health, which means it has enough money to pay dividends without hurting its business. Also, some companies have a plan that says how much they will pay in dividends. This plan helps them decide how much money they will give their shareholders. Different companies have different customs for paying dividends. Some companies are known for giving higher dividends than others. The overall economy and what investors expect can also affect dividend payments. Companies may pay more dividends to attract investors if the economy is doing well. But if the economy is not doing well, companies may pay less or stop paying dividends for a while. It’s important to know that not all companies pay dividends, and the amount can change yearly. Before investing in dividend stocks, research the company and consider your investment goals and how much risk you are comfortable with before investing in dividend stocks.

Investing in dividend-paying companies is a good idea, but should you?

Deciding whether to invest in companies that pay dividends depends on what you want to achieve with your investment, how much risk you can handle, and your situation. Here are some things to think about:

Income Needs: 

Companies that pay dividends can be good if you want to get regular money from your investments. Dividends give you a steady flow of cash, which can be helpful for retired people or those who need money from their investments.

Stability and Reliability:

 Companies that pay dividends are usually stable and strong. They make profits consistently, which means they are less risky than companies that don’t pay dividends, which is good for people who want safer investments.

Long-Term Growth: 

Dividend stocks can give you both money and the chance for your investment to grow over time. Companies that pay dividends might also see their stock prices go up. If you keep your dividends or hold onto your shares, you can benefit from long-term growth and make more money.

Diversification: 

Having a mix of different investments can help you reduce risk and earn more. Dividend-paying stocks can protect you during bad times in the stock market and help make up for losses in other investments.

But remember, not all companies pay dividends, and getting dividends is not guaranteed. Investing in dividend-paying companies has risks too. Before you decide, research, look at how healthy the company is, and think about your goals.

Evaluation of Dividend:

The common ways of evaluating dividends are:

Dividend Yield: 

Dividend yield shows how much money you can earn from dividends compared to the price of a stock. You can earn more money from dividends if the dividend yields are higher.

Dividend Growth Rate: 

The dividend growth rate tells us how much the dividend payments have increased over time. If the growth rate is higher, it shows that the company is giving more money to its shareholders.

Payout Ratio: 

The payout ratio shows how much of a company’s earnings are dividends. The company keeps more money for investments or future dividends if the ratio is lower.

Dividend Coverage Ratio: 

The dividend coverage ratio compares a company’s earnings to its dividend payments. If the ratio is higher, the company’s earnings are enough to cover the dividends, which is good because it lowers the risk of the company being unable to pay dividends.

These evaluation methods help us understand whether a company’s dividends are good. But we also need to look at other things like how well the company is doing financially and what we want to achieve with our investments. It’s a good idea to talk to experts or financial advisors to make smart decisions about dividends.

Conclusion:

In conclusion, dividends and dividend stocks can offer several advantages to investors. They provide a regular income stream, stability, and the potential for long-term growth. Dividends can be a valuable source of income, especially for retirees or individuals seeking consistent cash flow. Dividend stocks are often associated with financially stable companies and can be a part of a diversified investment portfolio. However, it’s important to consider individual investment goals, risk tolerance, and the specific characteristics of each company before making investment decisions.


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