While talking about the stock market, you must have come across various terms like interest payouts, capital preservation, and more. One of the most common ones among them is the dividend. Everyone investing in the stock market does so to earn profits and multiply wealth. Dividends help contribute to those objectives. However, what exactly is a dividend and how does it benefit you? While you will learn about it in stock market classes in Pune , here’s about its basics.
What is a Dividend and Types of Dividends?
A dividend is the money a company pays, usually quarterly, to its shareholders. Companies pay dividends out of their profits or reserves in various forms. Dividend payouts indicate a company’s solid position in the market and its promising future. For instance, suppose a company decides to pay a dividend of Rs. 10 per share. If you have 1000 shares of the company, you will get Rs. 10,000 every quarter in dividends. If you reinvest these dividends, you can buy more shares, thus increasing your stock holdings and future income.
Some types of dividends include the following.
- Cash Dividends: These involve paying money in cash to the shareholders.
- Stock Dividends (Bonus Shares) : Stockholders receive additional shares, also known as bonus shares
- Special Dividends: One-time payments stockholders receive under special circumstances, usually when companies make exponential profits or when a company is about to wind down its business.
How Does a Dividend Benefit You – 5 Benefits of Choosing Stocks with Dividends
Choosing stocks with dividends has various benefits, including the following.
1. Regular Income
Dividends provide a steady and regular source of income. Hence, they benefit everyone, including senior citizens, retired persons, and younger investors who aim to create a steady source of income through stocks. Instead of relying fully on stock price increments, this refers to a more predictable income. Some government companies like ONGC, HPCL, Colgate etc are known to give dividends every quarter.
2. Healthy Financial Indicator
As you’ve already seen, companies pay dividends from their profits. Thus, when a company pays regular dividends and increases by the year, it shows that its business is progressing swiftly and it is confident about its future. On the other hand, a company reducing its dividend share indicates poor financial health.
3. Contribution to Overall Returns
Dividends add to an investor’s total returns on an investment. It includes capital gains and dividend income. People who invest in the long run can benefit from dividends by increasing their overall returns.
4. Reinvestment of the Dividend
As an investor in a company, you can even choose to reinvest your dividend. Many companies offer that option that allows investors to automatically reinvest any cash dividend they get to buy additional shares. Such a strategy can help investors benefit from the compounding effect and enhance their returns.
5. Reduced Risk
Stock price ups and downs, called volatility, are part of the share market. No stock is an exception to it. However, dividend-paying stocks are a little less volatile than others. Thus, they provide a cushion to investors against market downs. The income investors earn through dividends can compensate for the decline in stock prices. So, a dividend-paying stock can reduce the overall investment risk.
Shortfalls Faced By Dividend Investors
One problem with dividends is that you receive it after tax deduction. In India, dividends are currently taxed as income. This reduces your overall net income. If a company instead reinvests in the business, it is better as the reinvested earnings are not taxed and don’t have to pay any transaction costs.
- Reduced capital with company – If a company pays dividend, it has less capital to grow its business later on. The company may have to raise capital later on which is an expensive process.
- Dividends are not guaranteed – A company may not always have extra cash at hand. If the economy isn’t doing well, a company may give up on dividends. If you are dependent on this income, it will hurt your personal finances.
Final Words
Dividends can change the face of your investments and make them more profitable. However, you should be just as careful while choosing a dividend-paying company as you are while selecting any other. Selecting such companies is a skill. This skill is honed if you educate yourself in all the kinds of analysis we require to find out amazing stocks. If you want to learn how to do that and make profitable investment decisions, enroll in Wealth Note.
We are one of the premier choices for the search – share market classes near me. Our comprehensive special investment and advanced trading courses, option trading course, along with other options like opening Demat accounts, and providing mutual fund support and insurance for all needs make us a standout.
Call us at +91 70666 66464 to learn more about our stock market classes in Pune.