What is Dividend in Share Market? – All You Need To Know

The number of people investing in the share market has skyrocketed. Do you know why? Because it offers an extensive range of features where people and companies can benefit from each other. One such feature is dividends. A dividend is a distribution of the profit earned by an organization among its shareholders. It can be paid in the form of cash, stock, etc. In this blog, we will learn what is dividends in the share market, their working, payment process, advantages, and more.

What is Dividend in Share Market: An Overview

A dividend is a payment made by an organization to its investors. It is paid out based on the profit gained by the organization. In simple words, dividing the payment of an earned profit with the investors is known as a dividend in the share market.

It is the company that decides the amount of the stock market dividend. They are either distributed in cash or added to the additional shares of stock. They allow the investors to grow monetarily and increase the reputation of their profiles in the market.

The policies for distributing the profit may differ from company to company. Some companies choose not to pay dividends to the investors and reinvest the profit. On the other hand, some choose to distribute the dividends even if they have not achieved marginal profit. 

Dividends: Working and Payment Processes

There is no significant rule to abide by when the companies pay dividends. The amount, payment, investments, and records completely depend on the board of directors in a company. The companies that do well in the marketplace tend to pay more dividends than the ones that don’t.

Dividends can be distributed as and when the company pleases, which can be quarterly, bi-annually, or annually. The payment of dividends affects the positive or negative profile of the company based on the expectations of the investors. You can learn more about dividends in the stock market through an in-depth stock market course.

The dividend distribution process works on four factors:

• Announcement: Here the company announces the distribution amount of dividends. 
• Declaration: The company sets the date to fund the dividends.
• Recording: It involves recording the date of dividends to check who will receive the dividend and what amount would be received.
• Payment: The last step includes the payment of dividends, where the company distributes the share of profit with the investors.

What is Dividend Yield in Stock Market? 

The term dividend yield is mostly used by the investors of the company. It is a term used to calculate how much they can expect to receive as a dividend depending on the stock they hold. It can be calculated by dividing the annual dividend per share by the current price of the market per share. 

For example, if a company is paying $4 per share with the current market price of $200, then the dividend yield can be calculated using the following formula:

Annual dividend/Current price x 100%

That is, $4/$200 x 100% = 2%

Hence, the dividend yield that an investor can expect to receive will be 2%.

Do All Companies Pay Dividends?

There is no specific condition for all companies to be paying dividends. It essentially depends on their policies and growth. Companies usually pay dividends to investors if they have a stable marketplace. If the company is relatively new in the market, it might decide not to pay dividends for different reasons. 

The shareholders of a company and its investors work hand in hand. Hence the profit of the company also affects the profile of the investors. The dividend culture has been adopted by many companies recently to grow mutually.

Companies can share the profit with investors in the following ways.

• Residual Dividends: Residual dividends are distributed to investors only if a significant amount of money is left after completing major requirements in an organization.

• Stable Dividends: Stable dividends are distributed by the companies that keep a different record for the profit mandatorily provided to the investors, irrelevant of the target achieved and profit earned.

• Hybrid Dividends: Hybrid dividends can be small in amount. However, the organizations that follow this route ensure to keep the amount separate from the fluctuations that their business may face.

Advantages and Disadvantages of Dividends

The following table explains the points of advantages and disadvantages of dividends in the share market:

Advantages	Disadvantages
The dividends provide a steady income to the companies.	When a company distributes dividends, it may decrease its growth potential.
They increase the confidence between the shareholders and the investors.	The market reaction, positive or negative, is a significant factor.
Most countries lower the taxes of the company where the dividends are included.	The dividends can disorder the management of incentives sometimes.

Conclusion

We hope that now you understand what is dividend in the share market. It is a payment made by the organization to its investors, in the form of cash, stock, etc. It allows the companies and the investors to benefit from each other. It also enables the investors to hold profitability and keep up with their profile in the market.