Evaluating dividends

It is seen as a sign of a company's financial health and prosperity. It keeps your cash flows steady when the market tanks. Dividends are the portion of the profit that companies share with the shareholders. This week we highlight the ‘dividend' aspect of investing in companies.

India Inc is not a big pay master when it comes to dividend. The dividend yield for the Nifty basket, for instance, is only 1 per cent. That is, for every rupee you invest in the Nifty stocks you only get one paise back as dividends each year.

Dividend yielding companies

However, even if the market as a whole isn't very lucrative for a dividend-seeking investor, there are quite a few companies that offer high dividends. ONGC, TCS and Bajaj Auto are some companies that have consistently given away high dividends. Like a PE ratio, a high dividend yield is a valuation metric that allows you to choose cheap stocks.

Some companies pay dividends semi-annually (called interim dividend) and some annually.

Dividend entitlement

When a company announces a dividend after its board meeting, it sends intimation to its shareholders. In the intimation letter sent, you would have to keep a note of the ex-dividend and record date. An announcement is also made to the stock exchanges. You can view this on the exchange websites.

You will be entitled to the dividend only if you held the stock on the record date. It is the date by which you should be in the company's records to be eligible to receive the dividend. If you sell the stock before the ex-dividend date, you will lose the dividend.

Dividend percentage and yield

But when it When it comes to evaluating dividends, do not get misled by the dividend percentage. It is the yield you should be looking at. Dividend yield is the company's annual dividend divided by the stock's current market price. It gives you the return you could earn on the stock (excluding capital appreciation in stock price) on the dividends paid out by the company, provided it pays the same dividend next year too.

That said, you will need to look at other aspects as well — consistency of the payout, the payout ratio and the cash flows enjoyed by the company to gauge if dividends will be sustained. Dividend payout, which is the percentage of profit paid as dividends, if consistent over a period of time, is a sign of steady growth. This will also help filter out companies that declare bumper dividends in a year on one-time gains (such as sale of investments).

Tax treatment

Dividend incomes are not taxed in the hands of the investor who receives them; but at the point of distribution in the hands of the companies. But, again, as the tax is paid only out of the profits of the company, the per share earnings fall and indirectly impact the investors. Companies pay 15 per cent of the distributable profits as dividend distribution tax to the government.

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