Is higher Dividend Yield better?
A high Dividend Yield does not necessarily connote stability. When stock price declines, Dividend Yield rises. In case of a downward spiral in stock prices, some companies increase Dividend Payouts in order to woo investors to stay invested. This led to further erosion of earnings with attendant implications on stock prices. Therefore, it is pivotal to track the consistency of Dividend Payouts for gauging a company’s stability.
What is the difference between Dividend Yield and Dividend Payout Ratio?
Dividend Yield of a stock measures the Cash Dividend that is paid out to its shareholders per year relative to every rupee invested in its equity. It is expressed as a percentage.
Dividend Yield = Annual Dividend per share / Current market price per share
Dividend Payout Ratio measures the percentage of net earnings that is paid out to shareholders in the form of dividends.
Dividend Payout Ratio = Dividend per share/Earnings per share
Retention ratio that is, the percentage of net earnings that is not distributed to shareholders as dividends is the inverse of Dividend Payout Ratio.
Retention Ratio = 1 - Dividend Payout Ratio
= 1 - Dividend per share/Earnings per share
Does Dividend Yield rise when stock price falls?
Dividend Yield = Annual Dividend per share / Current Market Price per share. If the Dividend payout stays the same, a decline in current market price will lead to a rise in Dividend Yield.
Can Dividend Yield be negative?
Dividend Yields can never be negative. As Dividend Payouts and Stock price cannot be negative, Dividend Yields cannot be negative as well.
How are dividends taxed?
For dividends distributed on or after 1st April, 2020, Domestic Companies/Mutual Funds are not liable to pay Dividend Distribution Tax (DDT). Dividends received are taxable in the hands of the shareholders/unit holders. Finance Act, 2020 abolished DDT and withdrew the exemptions u/s 10(34) of the Income Tax Act.
The tax treatment on Dividend Income varies according to the residential status of the shareholders/unit holders.
Resident Indians
Under Section 194, TDS (Tax Deducted at Source) @10% (20% in case of no PAN) is imposed if dividend income in a fiscal year is in excess of Rs 5,000. Dividends received are added to the total income of the shareholders/unit holders and taxed as per marginal rates of tax. TDS credit can be claimed at the time of filing income tax return. Tax payers whose total income (including Dividend Income) is below the Basic Exemption Limit can submit either Form 15G or 15H (applicable in case of Senior Citizens) for claiming Dividend Income without TDS. The shareholder/unit holder can claim deduction of interest expense incurred to earn dividend income to the extent of 20% of total dividend income. Dividends received from a foreign company are also added to the total income and taxed as per applicable tax slabs. In this case too, shareholders/unit holders can claim deduction of interest expenditure incurred to earn dividend to the extent of 20% of total dividend income.
Non Resident Indians
In the case of non-resident person (including FPIs and non-resident Indians (NRIs)), the dividend income is taxable at the rate of 20% without any deductions. The TDS (Tax Deducted at Source) rate is 20% subject to Double Taxation Avoidance Agreement (DTAA), if any. In order to avail lower TDS, the shareholder/unit holder needs to furnish documentary proofs like Form 10F, declaration of beneficial ownership, tax residency certificate etc. If there is no documentary proof, higher TDS will be deducted which can be claimed at the time of filing Income Tax Return. Applicable Surcharge and Health & Education Cess (HEC) @4% are also levied.
The company pays high/low dividends. What does this indicate?
Companies pay Dividends out of their accumulated Earnings. Value stocks are normally characterised by low Price Earnings Ratio and high Dividend Yields. Growth stocks, on the contrary, tend to have high Price Earnings Ratio and low Dividend Yields. They tend to plough back their earnings in order to bolster growth. Their Retention ratio, that is, the inverse of Dividend Payout ratio is high. Companies that have a consistent track record of stable or increasing dividend payouts for at least 10 years are called Dividend Aristocrats.
Do I need to have financial knowledge in order to use Dividend Yield Calculator?
The Dividend Yield Calculator is easy to use. It needs just 2 inputs namely, Annual Dividend per share and the Current stock price. Based on the inputs, the calculator gives you the Dividend Yield in a matter of seconds. The output is expressed as a percentage.
Is Dividend Yield a reliable metric for making informed investment decisions?
Dividend Yield is not the sole metric for gauging the financial stability of a company. Other metrics like Return on Assets, Return on Equity, Current Ratio, Quick ratio, Debt Equity ratio, Price Earnings ratio etc are also pivotal for making informed investment decisions. In the case of Dividend Yield, consistency of Dividend Payouts is critical. Companies that exhibit consistency in paying stable or increasing dividends for at least 10 years are considered robust.
What is IDCW option in Mutual Funds?
IDCW is the acronym for Income Distribution cum Capital Withdrawal. In Apr 2021, Securities and Exchange Board of India (SEBI) changed the term ‘Dividend option’ in Mutual Funds to IDCW. Mutual funds’ income can either originate from Dividends paid by stocks or from Capital Gains made through selling of stocks. According to SEBI, this income is essentially coming out of investors’ capital. In other words, this is tantamount to withdrawal of capital. Dividends paid by mutual funds can stem from dividend income or capital gains or a combination of both.
What is Dividend investing?
Dividend Investing is a method of buying stocks that pay regular dividends to its shareholders. This strategy is normally used by risk-averse investors. In the event of a decline in stock prices, dividend income can be used to mitigate or offset capital loss. For example, you own a stock that pays 2.5% dividends per share. The stock price is Rs 50. Thus, you will receive Rs 1.25 (2.5%*50) dividend per share. Assuming that you own 1000 shares, total dividend that you will receive is 1000*1.25 = Rs 1,250.
How does Dividend per share affect Dividend Yield?
Dividend Yield = Annual Dividend per Share/Current Market Price per Share
If the numerator increases assuming a constant denominator, Dividend Yield will increase. Thus, a rise in Dividend per Share (assuming constant market price) will bump up Dividend Yields. The reverse is also true. Assuming constant market price, if Dividend payout declines, Dividend Yield falls.
What is Dividend Yield Trap?
Dividend Yield Trap refers to a situation where an investor continues to invest in a stock with high Dividend Yields but weak fundamentals. Weak fundamentals amplify the risk of earnings downgrades. Plummeting stock prices may artificially inflate Dividend Yields. However, earnings downgrades signal that dividends payments may not be sustainable in future. Capital loss from a moribund stock combined with a decline in Dividend Payouts is a double whammy for investors. It is pivotal to perform due diligence of the stocks in order to identify any red flags like erratic cash flows, rising leverage, negative free cash flows etc.
Do all stocks pay dividends?
Not every stock pays Dividends. Mature companies tend to have higher Dividend Payouts. Growth stocks, on the contrary, have low Dividend Yield as they reinvest their earnings to further growth. A high Dividend Yield does not necessarily indicate stability. In the event of a continuous decline in stock prices, a bad company may increase Dividend Payouts in order to entice investors to stay invested. Though it artificially inflates the Dividend Yield, the action may boomerang as bereft of earnings visibility, the stock price may plummet further.