Dividend – Dutch Uncles

What are Bonus Shares: Overview, Types and Benefits

Shalmoli Sarkar — Mon, 27 Sep 2021 03:35:13 +0000

The word ‘bonus’ gives people a surreal level of happiness. Be it winning bonus points in a quiz competition or getting one month’s salary as a bonus during the Diwali festival. Similarly, companies in the stock market also issue bonus shares to collect some more funds. But, what are bonus shares and what ‘bonus’ does an investor get?

What are bonus shares?

Bonus shares are additional shares given to the existing shareholders without any additional cost. Firms follow the Indian retail shopper’s favourite scheme of ‘Buy One Get One free’ where a current shareholder will get free or additional shares based on the existing or earlier shares held in the company.

Why do companies issue bonus shares?

Bonus shares are issued by the companies when they are facing a financial crunch and are not able to pay dividends to their shareholders despite earning decent profits in a particular quarter. The profits earned are not sufficient to distribute as dividends. In such cases, these shares are issued in place of dividends.

Companies also issue bonus shares to capitalise on a part of the company’s retained earnings. Moreover, such shares are also issued to encourage retail participation and increase their equity base as an increase in the number of shares reduces the price allowing more investors to participate.

The bonus share distribution works in this way:

Suppose, an investor holds 300 shares in a company. The company declares a 4:1 bonus which means that now the investor, for every share bought, will get 4 additional free shares thereby, totalling its hold to be 1200 (300X4) shares.

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Receiving bonus shares increases the share of an investor in the company and bolsters trust as the cash will be used by the company for its growth.

Types of bonus shares

There are two types of bonus shares issued:

Fully paid:

Fully paid bonus shares are distributed to the investors with no additional cost in the proportion of the shares held in the company. These bonuses are issued from the following sources:

Profit and Loss account
Capital reserves
Capital redemption reserves
Security premium account

Partly-Paid:

Some shares in the company can be bought by an investor by not paying their full price which is called partially paid shares. The remaining amount is paid through instalment. But, when the partially paid shares are distributed as bonus shares, the partially paid shares of the investor are converted into fully paid shares. These shares are issued from the below sources:

Investment allowance reserve
General reserve
Development rebate reserve

Who is eligible to purchase bonus shares?

Investors who own a company’s shares before the ex-date and record date become eligible to receive bonus shares from the company.

Here, the record date is the date when the issuing company fixes a particular date to check its records to identify shareholders of the company eligible for receiving bonus shares. Ex-date is the date just a day before the record date set by the company. In India, the delivery of shares into a Demat account takes place two days after the trading date.

Advantages to the investor for having bonus shares

Investors need not pay any tax while receiving bonus shares from the company.
Owning such shares is beneficial for long-term shareholders who want to double their investment.
Receiving bonus shares increases the share of an investor in the company and bolsters trust as the cash will be used by the company for its growth. This speaks for the company’s commitment towards long-term growth and liquidity of stocks.
If a company declares dividend, the bonus shareholders will receive a higher dividend due to a large number of shares held.

Disadvantages

There are no disadvantages of owning bonus shares but an investor should know that profits received will be the same after receiving bonus shares. The earning per share will fall since the number of shares will be increased.

The post What are Bonus Shares: Overview, Types and Benefits appeared first on Dutch Uncles.

How To Calculate The Dividend Payout Ratio?

Aakash Sharma — Sun, 19 Sep 2021 08:35:08 +0000

Dividend payout is the ratio of the total amount in dividends paid out to shareholders to a company’s net profit. The dividend return is paid to shareholders from portions of a company’s profits. The dividend payout ratio is sometimes referred to as the payout ratio.

Companies use the unpaid dividends or leftover profits for numerous corporate tasks, including debt settlement and reinvestment in the business. When a company makes good profits, it can choose to distribute those gains to shareholders in the form of dividends. Investors calculate the percentage of profits used for dividend payouts to common shareholders using the Dividend payout ratio.

This ratio is calculated by dividing the dividends per common share with earnings per share (this information is included in the company’s income statement). Dividing the dividends per common share by the earnings per share gives the dividend payout. The result is the percentage of profits that dividends compose.

There are two major benefits of knowing this percentage:

For investors looking for a stable return on their investment, dividend payout ratios are an integral part of their investment strategy.
The ratio of earnings that companies pay out in dividends reflects their growth plans. A low dividend payout with no expansion may show trouble; the same is true for a high dividend payout in a growing company.

Example of the Dividend Payout Ratio

Assume that Company XYZ’s annual net earnings per share are Rs 20,000 per share. In this time, the company declared and paid dividends to shareholders of Rs. 5,000 per common share. The dividend payout ratio (DPR) is calculated as follows:

Dividend Payout Ratio = Rs. 5,000 / Rs. 20,000 = 25%

Therefore, a payout percentage of 25% means that Company XYZ pays out 25% of its net income to shareholders. The remaining 75% of net income kept by the company for growth becomes its retained earnings.

Often larger or non-operational companies have higher dividend payout ratios, while smaller or larger companies retain those earnings for future growth.

Calculating the dividend yield is critical for investors concerned with the amount of income they will generate from the dividends on their stock. This metric tells how much income they will develop in the form of bonuses for their price on each share of stock.

Dividend yield

By comparing the dividend yield of different companies, you can decide if you will get a competitive dividend price based on the stocks.

Here is how to use this equation. Look for dividends per common share at the bottom of a company’s earnings report and check the stock equities market. You can also have your broker calculate the market price per share.

Divide the dividends per common share by the market price per common share to calculate the dividend yield.

Dividend yield determines the percentage of value an investor pays for his shares issued in the previous year’s dividends. Remember that the number of dividends paid out each year can vary, meaning dividend income may not be reliable unless the company you are examining pays the same dividends every year historically.

Difference between dividend yield and dividend payout ratio

In comparing these two parameters, it is essential to note dividend yield highlights the simple rate of return in the form of cash dividends to shareholders. On the other hand, the dividend payout ratio refers to the amount of profit that a company pays in dividends.

What more does the dividend payout ratio tell?

The dividend payout ratio is the most crucial metric used to determine the profitability of a company’s dividend payment program. It is the number of dividends paid to shareholders relative to the total net income of a company.

Diligent and active investors do not always seek high dividend payout companies to invest in. An unusually high dividend payout ratio indicates that the company is trying to hide its activities by providing more dividends to investors or by not thinking about using the capital in any way for growth.

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Investing in Dividend Stocks? What Investors Should know About the Dividend Yield Ratio

Shalmoli Sarkar — Tue, 14 Sep 2021 08:35:10 +0000

Risk-averse investors are heavily dependent on the dividends released by the company as it is a means of steady income. Therefore, they invest in dividend stocks. A dividend is the distribution of a company’s profits to its shareholders, and is normally paid out once a year or semi-annually. Investing in dividend stocks is beneficial to such investors as it gives them two sources of potential profits:

The predictable income from regular dividend payment by companies
Stock price appreciation as the company grows over time.

However, blindly investing in dividend stocks might invite risks, therefore, it is necessary to first evaluate a company using the dividend yield ratio.

What is a dividend yield ratio?

The dividend yield ratio is a financial metric used to evaluate a company before purchasing its stocks. The ratio does not indicate good or bad stocks but is used to assess risks and benefits involved while investing in such stocks and to check if these meet an investor’s financial objectives.

Dividend yield ratio – how is it calculated?

The ratio is computed by dividing the dividend per share by the market price per share and multiplying the same by 100. Here is its mathematical formula,

Dividend yield ratio = Dividend offered per share / Market price per share

For instance, if a company has announced Rs 20,00,000 as a dividend to be paid to its shareholders and the total number of stocks is 10,000 then the dividend for each share will be calculated as

Dividend per share = 20,00,000/ 10,000 = 200

So, the investors shall receive Rs 200 for each share.

Now, say the market price of shares of the same company is Rs 2000 then the yield ratio is (200/ 2000) * 100 = 10 percent.

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The dividend yield ratio can determine cash flows from a company to its investors owning stocks or shares.

Why do we need a dividend yield ratio?

The ratio can determine cash flows from a company to its investors owning stocks or shares. It shows the percentage dividend receivable worth every rupee of stock purchased.

Some investors such as retirees who prefer low-risk investments depend on dividends for income. By analysing the dividend yield ratio, they can understand the financial health of a company and its investment effects on personal finances. It will also help investors to select dividend stocks that have better dividend payout records showing reliability, and delivering good returns in the future.

Is High dividend yield ratio good or bad?

In India, which has a fast-growing economy and market, companies pay fewer dividends as compared to developed markets. The average dividend yield is 1.57 percent for BSE Sensex and 1.52 percent in BSE 100 index whereas in Japan’s Nikkei 500 it is 1.87 % . Moreover, in the USA and Hong Kong the average dividend yield is 2.07 percent and 3.38 percent respectively.

The reason behind India having a low dividend ratio is companies’ objective to prioritise growth. Here, the companies retain a large part of the profit for themselves and utilise it for market expansion or research and development, hence, sharing fewer profits with the shareholders.

A company having a high dividend yield ratio means that it is sharing profits with investors. In India, usually, public sector banks and companies, MNCs in the pharma and consumer space offer a high dividend yield ratio. Investors with the dividend received can reinvest to buy more stocks and reap more benefits.

Companies with a good yield ratio indeed are good investment decisions as in the future they will give good payoffs. However, merely depending on high dividends is a sign of trouble. The company that gives out unusually high dividends means they are not keeping a substantial portion of profits as retained earnings.

Investors, here, need to be cautious since a high yield ratio can also mean a fall in stock price. A declining stock price increases the yield ratio that speaks of financial instability in a company.

Therefore, investors need to check the valuation and the consistency of dividend-paying outs of a company.

Types of dividend yield ratio

There are two types of dividend yield ratios through which the investors can anticipate getting a better understanding of the company’s dividend yield.

Forward dividend yield: A forward dividend yield is the ratio of a company’s expected dividend payout to its current stock price.
Trailing dividend yield: It is the ratio of the company’s actual dividend payments to its share price over the previous 12 months. When future dividend payments are not predictable, the trailing dividend yield can be one way to measure value.

A word for the investors

The consistency in dividend yield and strong fundamentals are some of the positive indicators for purchasing a dividend stock. However, investors should also consider macroeconomic factors such as government policies before investing.

The post Investing in Dividend Stocks? What Investors Should know About the Dividend Yield Ratio appeared first on Dutch Uncles.

Should I Opt For Dividend Investing?

Aakash Sharma — Mon, 13 Sep 2021 05:35:08 +0000

As long as you buy and invest wisely, buying dividend stock can pay off over time. Some companies have lucrative reinvestment plans, commonly known as dividend reinvestment plans (DRIP). With DRIP, you can redeem your dividend earnings to make money instead of cashing the dividend out. This is an intelligent plan when your dividend income is low, either due to a business’s initial growth stage or when you do not have enough stock shares.

Investment in stocks with a growth option

The growth option on investment means that investors in the fund do not receive any dividend returns on the shares. However, the investor allows the company to give profits on those dividend earnings by choosing the growth option. This improves the net asset value (NAV) of the invested fund.

Dividend reinvestment

Dividend reinvestment opportunities are very different from growth opportunities. In reinvesting the dividends, investors purchase additional shares in a company’s stock. In simple terms, when dividends are paid out of equity, no money is distributed to investors.

Fund managers use the dividend funds to automatically buy more shares on behalf of investors and transfer them to individual investor accounts. This method increases the number of stakes over time and generally increases faster than the account’s value if the owner does not reinvest the profits.

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Shareholders can forgo growth opportunities in either of the ways mentioned above and get dividends cash immediately. In such a case, the money is paid directly to the investor.

Prefer quality over quantity

One of the most crucial concerns when choosing the dividend reinvestment avenue is profitability by dividend — the higher the product, the better the return. If the current level of a stock’s dividend payout is not long-term, then the total market profit will disappear quickly. Keep this in mind before choosing a plan.

Leading companies are promising to bet on

The stock market works in cycles and often repeats itself over and over. If you choose to invest in dividends, there is no one better than the stocks of market leaders. Established companies that have steadily increased their ROI over the past 25 years are the safest investment options for you. If brands are easily recognisable and generate a steady cash flow, they are likely to continue turning in profits for the shareholders and pay good dividends.

Purpose of having different options

Investors should make decisions based on their personal goals and financial needs. However, once the investor gains clarity on these aspects, making a choice can be pretty effortless. The net asset value (NAV) of the dividend option in an investment fund might be different in different cases. Picking the one that aligns with your aims is the best way to go.

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