Message in a dividend

Does the dividend payment reflect the actual underlying health of a company?
Message in a dividend
Today, the scenario stands changed. Now the companies sell their shares by saying, “the purpose of the company is to increase shareholders’ wealth.” [Representational Image]Pxhere [Creative Commons]

A listed company on stock exchanges shares a percentage of its profits with its shareholders. A shareholder receives this portion of the company’s earnings, based on the number of shares he or she holds. In an investor’s language, the earnings shared by the company with its shareholders is called dividend.

During the first part of the twentieth century, dividends were the primary reason investors purchased stock. The companies literally used to attract investors by promising to pay dividends.

Today, the scenario stands changed. Now the companies sell their shares by saying, “the purpose of the company is to increase shareholders’ wealth.”

More commonly, the dividends are paid on an annual basis. And, of course, dividend payment that too with an increasing percentage is considered as a reflection of the company’s sound and stable financial health. In other words, dividend pay-out is important in the context of a company’s reputation and soundness.

There are many examples of how the decrease and increase of a dividend payment can affect the price of the company’s share.

Companies that have a long-standing history of stable dividend pay-outs would be negatively affected by lowering or omitting dividend payment; these companies would be positively affected by increasing dividend pay-outs or making additional pay-outs of the same dividends.

Furthermore, companies without a dividend history are generally viewed favourably when they declare new dividends.

To be precise, in the world of share markets, dividends have always remained in the focus of investors. Handsome dividend payout by a company gives investors good reason to hold onto the shares of the company for longer periods of time.

For many investors, dividends are a steady stream of income. It is interesting to note that there is a class of stocks named “widow and orphan stocks”.

This class of stocks includes higher-paying dividend stocks that were historically considered to provide income and be less sensitive to market volatility.

It also merits a mention that companies that focus on growing their dividends have performed better historically and with less risk than those that pay no dividends, don’t increase them or cut them.

In today’ scenario, we observe that many investors are not giving importance to the dividends as they are fiercely engaged in carving out their earnings through trading of shares.

But the fact is that dividends constitute the dependable part of a stock’s total return. It’s the dividend which reflects the actual underlying health of the company.

For investors who have a long-term perspective, dividends will add value to total return on their investment and will face less volatility. However, market experts point out that not all dividends are the same and require some review to determine which direction they are headed. This means one should not pick stocks on the basis of a casual comparison of dividend yields.

Sometimes, a company suspends dividend payouts to its shareholders. The main reason for this would be the financial strain faced by the company.

Shareholders have to understand that the dividends are paid to shareholders out of a company’s retained earnings. A company facing strain on its earnings may choose to stop dividend payments to safeguard its reserves for future.

Meanwhile, in today’s market scenario, ownership of stocks changes faster than it used to be. This has landed the payment of dividends in an interesting situation. While entering into a stock, the investors have an opportunity to pocket the dividends as one of the components of return on their investment.

When do investors have to buy a stock in order to receive the dividend payment?

It’s basically when you buy and sell shares, which decides your eligibility for receiving the dividend. In simpler terms, dates determine who gets the dividend and who doesn’t. So, dates assume significance in determining the rightful recipient of dividend payments.

Some important dates in the life of a dividend are – declaration date, ex-dividend date, date of record and date of payment.

The date on which the board of directors announces that the company will pay a dividend to its shareholders is the declaration date.

The date the company mails out or credits the dividend to the holder of record is the record date. A holder of the record is an investor who is listed on the date on which the company looks at its records to see who the shareholders of the company are. This date is called the record date.

If you are not in the company’s record books on the date of record, you won’t receive the dividend payment. To ensure that you are in the record books, you need to buy the stock at least three business days before the date of record, which also happens to be the day before the ex-dividend date.

What is the ex-dividend date?

Ex-dividend date is a tricky date. This date decides the recipient of a dividend in the process of shares of the company changing hands. On this date and even after this date, the shares are traded without its dividend.

If you buy a dividend paying stock one day before the ex-dividend you will still get the dividend, but if you buy on the ex-dividend date, you won’t get the dividend.

Conversely, if you want to sell a stock and still receive a dividend that has been declared you need to sell on (or after) the ex-dividend day. So, ex-dividend date is used to make sure dividend payment goes to the right people.

Here it’s important to mention a word about the settlement date. This is the date on which the transaction becomes finalized. On this date the buyer pays for the securities and becomes the official shareholder of record while the seller relinquishes her ownership status and collects the money.

For shares, the settlement date is the trade date plus three business days (known as T + 3). The seller has three business days after the trade date to deliver the shares to the buyer.

In succinct, investors have to understand the significance of dates in dividends in their own interests.

What are unclaimed dividends?

There’s a class of dividends known by the name of unclaimed dividends. These are the dividends which have been paid by the company but not taken or claimed by the shareholder.

The reason for dividends not being claimed may be ignorance or shareholders may have shifted to another place and therefore missed the dividend cheque.

If a shareholder fails to encash or claim his dividend within seven years from the date of its transfer to the unpaid dividend account, it will, in terms of the provisions of Section 205A of the Companies Act, 1956, be transferred to the Investor Education and Protection Fund (IEPF) established by the Government.

In terms of the provisions of Section 205C of the Companies Act, 1956, no claim shall lie against the Corporation or the said Fund after the said transfer. In other words, once an unclaimed dividend is transferred to the IEPF, it cannot be refunded.

IEPF uses the amount of unclaimed dividend to run investors’ education programmes and conduct seminars through registered voluntary associations or organizations.

The programmes are run in various languages including regional languages. Even research projects pertaining to investor education and awareness by coordinating with institutions like Indian Institute of Capital Markets (IICM) are handled by the Fund.

Financial assistance is also provided under this Fund for some special projects and research activities for the benefits of investors.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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