Dividends are portions of profits made by the company, which are distributed to the company’s shareholders. Dividends are paid on a per-share basis. For example, Infosys recently declared a dividend of Rs.42/- per share, which means you get Rs.42/- as dividend income for every share you own. Suppose you own 100 Infosys shares; you can get 100*42 = Rs.4,200/- as dividend income. (View Highlight)
The dividend paid is also expressed as a percentage of the face value. In the above case, the face value of Infosys is Rs.5/-, and the dividend paid was Rs.42/- hence the dividend payout is said to be 840% (42/5). (View Highlight)
It is not mandatory to pay dividends every year (View Highlight)
The dividends need not be paid from the profits alone. If the company has made a loss during the year but it holds a healthy cash reserve, it can still pay dividends from its cash reserves. (View Highlight)
Dividend Declaration Date: This is the date on which the AGM takes place, and the company’s board approves the dividend issue (View Highlight)
Record Date: The date the company decides to review the shareholder’s register to list all eligible shareholders for the dividend. Usually, the time difference between the dividend declaration date and the record date is 30 days. (View Highlight)
Ex-Date/Ex-Dividend date: The ex-dividend date is normally set two business days before the record date. Only shareholders who own the shares before the ex-dividend date are entitled to receive the dividend. This is because, in India, the equity settlement is on a T+2 basis (View Highlight)
Dividend Payout Date: The date on which the dividends are paid to shareholders listed in the company register. (View Highlight)
Cum Dividend: The shares are said to be cum dividends till the ex-dividend date. (View Highlight)
When the stock goes ex-dividend, usually, the stock drops to the extent of dividends paid. For example, if ITC (trading at Rs. 335) has declared a dividend of Rs.15. On ex-date, the stock price will drop to the extent of the dividend paid, and as in this case, the price of ITC will drop down to Rs.320. (View Highlight)
you will not always notice a significant price drop in the share price. (View Highlight)
Sometimes, the company pays out a special dividend. A special dividend is non-recurring and happens on a ‘one-time basis.’ The special dividends are usually very large payments compared to a regular dividend, and that’s when the stock price significantly drops. The drop in stock price should not be considered negative (View Highlight)
Lastly, dividends can be paid anytime during the financial year. If it’s paid during the financial year, it is called the interim dividend. If the dividend is paid at the end of the financial year, it is called the final dividend. (View Highlight)
A bonus issue is a stock dividend allotted by the company to reward the shareholders. In regular dividends, cash is paid out to shareholders, but in a bonus issue, stocks are paid out instead of cash. (View Highlight)
The shareholders receive these free shares against shares they currently hold. These allotments typically come in a fixed ratio of 1:1, 2:1, 3:1, etc (View Highlight)
In a bonus issue, the stock price declines to the extent of the bonus ratio (View Highlight)
If the ratio is 2:1, the existing shareholders get two additional shares for every share they hold at no additional cost. So if a shareholder owns 100 shares, 200 additional shares will be rewarded. The total holding after the bonus issue will become 300 shares. When the bonus shares are issued, the number of shares the shareholder holds will increase, but an investment’s overall value will remain the same. (View Highlight)
The bonus announcement date, ex-bonus date, and record date are similar to the dividend issue. (View Highlight)
Companies issue bonus shares to encourage retail participation, especially when the company’s price per share is very high, and it becomes tough for new investors to buy shares. The number of outstanding shares increases by issuing bonus shares, but the share price is slashed, as shown in the example above. (View Highlight)
11.4 – Stock Split
The word stock split sounds weird, but this happens regularly in the markets. What this means is quite literally – the stocks that you hold are split! (View Highlight)
Similar to a bonus issue, when the company declares a stock split, the number of shares held increases, but the investment value remains the same (View Highlight)
The big difference between a bonus and a split is that in the bonus issue, the face value of the company remains unchanged, but in a stock split, the face value changes (View Highlight)
Like a bonus issue, a stock split encourages more retail participation by reducing the value per share. The dates and timeline (announcement date, ex-date, record date, etc.) are similar to dividend and bonus issues. (View Highlight)
Rights Issue
The idea behind a rights issue is to raise fresh capital (View Highlight)
instead of going public, the company approaches its existing shareholders. Think about the rights issue as a second IPO and a select group of people (existing shareholders) (View Highlight)
The rights issue could indicate promising new development in the company, but this is not always true (View Highlight)
The shareholders can subscribe to the rights issue in the proportion of their shareholding. For example, 1:4 rights issue means for every four shares; the shareholder can subscribe to 1 additional share (View Highlight)
The new shares under the rights issue will be issued at a lower price than what prevails in the markets. For example, if a stock is trading at Rs.500 per share, then the right issue could be at a 20% discount, at Rs.400 per share. (View Highlight)
Buyback of shares
A buyback can be seen as a company’s method to invest in itself by buying shares from other investors in the market (View Highlight)
Buybacks reduce the number of shares outstanding in the market; however, the buyback of shares is an important corporate restructuring method (View Highlight)
When a company announces a buyback, it signals the company’s confidence in itself. Hence this is usually positive for the share price, but like other things in the market, always evaluate the reasons for the corporate action. (View Highlight)
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