Investments are required if you want to achieve your financial goals. However, what is needed is that the investments beat inflation. Stocks are one such investment. They provide you with inflation beating returns in the long run. This return is known as capital gains when you sell the stocks. People often forget that they can get income from such stock investments. This is known as dividend income. Dividends, bonus, rights issue, etc. are the benefits you can avail from investing in stocks. So, when you get dividends, bonus, capital gains, etc you have invested in a high yielding stock.
What is dividend?
Dividend is the money distributed by a company to its shareholders. This is usually taken from the companyâ€™s profit earnings. Dividends can be paid quarterly or annually.
Note that dividend is at the discretion of the company. It may or may not declare dividends every year. However, most high dividend yield companies declare dividends year on year. Dividends are decided by the board of directors of the company.
Why are dividends important?
You may buy a companyâ€™s shares now. However, getting returns from the shares may happen only after many years of remaining invested. In the interim time, your gains will be from the dividends declared by the company whose stocks you hold. That is the reason why you need to research on the company before you begin to invest in its shares. Â You need to analyse its balance sheet, cash flows, its future revenue prospects, etc. to get a clear picture of the financials of the company. By choosing the right company, you can get income from the shares you hold. Now, let us understand what is dividend and what are dividend yield stocks.
What is dividend yield?
Dividend yield is the ratio of dividend paid per share to the shareâ€™s current market price (CMP). So, dividend Yield= Dividend per share/ CMP of share*100
What is dividend pay-out ratio?
This is the percentage of the companyâ€™s net income that it distributes as dividends to its shareholders. Note that if the dividend pay-out ratio is more than 100%, it is not great. Why? This is because the business will become unsustainable in the long run by providing such dividends. So, the dividend pay-out ratio shouldnâ€™t be too high.
What is record date and ex-date?
Record date is the date by which you should have held the shares, if you want dividends declared by the company. The shareholders who purchase shares at least two business days before the record date will be eligible for dividend pay-out. Ex-dividend date is the date from which dividends will not be applicable for shareholder. If you purchase shares on the ex-date or after it, you will not get dividends.
What is dividend reinvestment?
A dividend reinvestment program or plan is an option offered directly by the company whose shares you are holding. If you opt for this, you wonâ€™t receive dividends directly as cash; instead, the dividends are directly reinvested in the shares of the company. Over the years, company that offers dividend reinvestment has provided better returns to investors than one without dividend reinvestment. Consistent reinvestment of dividends in a well- established company can yield good returns over time.
Highest dividend yielding stocks 2021
Here are some of the highest dividend paying stocks in India in last 5 years.
|Dividend Yield (%)
*As of 4th Feb 2021
If you are planning to invest in dividend yield stocks, note that there have been cases where companies provide dividends without stable earnings. They provide dividends by selling their assets or taking loans. So, read the cash flow statements of the company to look at their revenue streams. It will show the companyâ€™s earnings capability. A positive cash flow means the company gets more cash than it spends. Operational cash flow is the amount of money a business generates from its regular operational activities. It is the main source of income. Hence, these are measures to look at before investing.
Taxation of dividend
According to the Finance Act, 2020 (the Union Budget 2020), all dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder. Prior to April 2020, the companies were liable to pay the Dividend Distribution Tax and the recipients were exempted from paying tax on dividend upto Rs 10 lakh a year in dividend income. Now the DDT liability on companies and mutual funds have been withdrawn since 1 April 2020. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs 10 lakh (Section 115BBDA) has also been withdrawn.
Interest expense deduction
As per the Finance Act, 2020, you can claim deduction of interest expense incurred against the dividend (the amount paid as interest on any money borrowed to invest in the shares or mutual funds is allowable as a deduction). However, the deduction should not exceed 20% of the dividend income received. You are not entitled to claim a deduction for any other expenditure incurred for earning the dividend income.
Budget 2021 has proposed that the dividend recipient does not have to pay advance tax on dividend prior to receiving it. The tax payer only needs to pay tax after the dividend is received. This will save the unnecessary interest which taxpayers would have incurred in the case of late payment of advance tax due to failure to estimate dividend income.
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