Dividend in the Stock Market
When you invest in the stock market, you earn money in two main ways—one is through the increase in share price, and the second is through dividends. Many new investors often hear the word “dividend” but don’t fully understand what it means. In simple terms, a dividend is a reward companies give to their shareholders from their profits. It is like saying “Thank you for investing in our company.”
This article explains dividends in an easy way, with examples, so you can clearly understand how they work and how they become a source of income.
What Exactly Is a Dividend?
A dividend is a portion of a company’s profit that is shared with people who own its shares. Not every company gives dividends, but most ** financially strong, stable, and profitable companies ** distribute dividends regularly. For example, companies like ITC, Infosys, HDFC Bank, TCS, and many others have a long history of paying dividends to their investors.
When a company earns profit, it has two options:
- Reinvest the profit back into the business (to expand).
- Share a part of that profit with shareholders in the form of dividends.
If a company chooses the second option, shareholders receive money directly in their bank accounts. This makes dividends a form of passive income.
Why Do Companies Pay Dividends?
You might wonder, “Why would a company give away its profit?”
There are several reasons:
1. To Reward Investors
Shareholders support the company by investing their money. Dividends are a way of showing appreciation.
2. To Build Trust
Regular dividend payments show that the company is financially healthy and stable.
3. To Attract Long-Term Investors
Many people prefer companies that give regular dividends. This brings stability to the stock price.
4. To Maintain Reputation
Companies that pay dividends for many years become known as “trustworthy and consistent,” which helps their brand.
Types of Dividends
There are mainly three types of dividends an investor should know:
1. Cash Dividend
This is the most common type.
Cash dividend means the company transfers money directly into your bank account.
2. Stock Dividend
Instead of giving cash, the company gives additional shares.
For example, if you receive a 10% stock dividend, you get 10 extra shares for every 100 shares you hold.
3. Special Dividend
This is a one-time big payout.
Companies give special dividends when they have extra profits or have sold an asset.
How Do You Receive Dividends?
To receive a dividend, you must own the share before the ex-dividend date. The company announces a few dates when it declares dividends:
✔ Declaration Date
The day the company announces the dividend.
✔ Ex-Dividend Date
You must buy the share before this date to be eligible.
✔ Record Date
On this date, the company checks its list to see who should receive dividends.
✔ Payout Date
The day dividend money is actually sent to your bank.
If you buy the share on or after the ex-dividend date, you will NOT get the dividend.
Example to Understand Dividend Income
Let’s understand with a very easy example.
Suppose you buy 100 shares of ITC Ltd.
Now the company announces a dividend of ₹10 per share.
So your dividend income will be:
100 shares × ₹10 = ₹1,000
This ₹1,000 will credit directly to your bank account on the payout date.
This means you earned income without selling your shares. You still own the 100 shares, and they can also grow in value in the future.
That is why dividends are considered extra income + long-term wealth creation.
Why Are Dividends Important for Investors?
Many smart investors prefer stocks that pay regular dividends. Here’s why:
1. Regular Income (Passive Income)
You earn money every year or every few months without doing anything.
2. Helps in Financial Stability
Even if the market falls, dividend-paying companies usually remain strong.
3. Long-Term Wealth Creation
If you reinvest your dividends, your wealth grows much faster (this is called compounding).
4. Lower Risk
Companies that pay dividends are usually profitable and stable.
Do All Companies Give Dividends?
No. Many growing companies do not give dividends because they prefer to reinvest profits to expand their business fast.
For example, young tech startups or newly listed companies focus on growth instead of dividends.
This doesn’t mean they are bad investments. It simply means their priority is expansion rather than cash rewards.
On the other hand, mature companies with steady cash flow regularly give dividends.
Dividend Yield — Another Important Concept
Dividend yield tells you how much return you are getting from the dividend compared to the share price.
Dividend Yield = (Dividend per Share ÷ Share Price) × 100
Example:
Dividend per share = ₹20
Share price = ₹400
Dividend Yield = (20 ÷ 400) × 100 = 5%
This means you earn 5% annual return in the form of dividends alone.
Final Thoughts
Dividends are one of the simplest and most reliable ways to earn income from the stock market. They reward investors for staying invested and offer steady cash flow along with long-term wealth creation. Even if you are a beginner, understanding dividends can help you choose better companies for stable income.
Just tell me!
