Investors invest their hard earned money in public company’s common stocks in exchange of a percentage of ownership, dividend and a piece of earnings.
Dividend is not guaranteed on common stocks. Those companies that are substantially making profit issue dividend per share (DPS) of holding out of their net profits. If a company has declared DPS of Rs 1, then a shareholder with 100 shares will receive Rs. 100.
Dividend is one thing that a company can’t fake as its a cash payment made to shareholders of holding company’s stock. Some investors gets comfort as its the real money that gets deposited into their bank account.
Public sentiments depends on the amount of DPS a company declares. If they declare higher amount that they normally declare, then public sentiments tend to soar.
It doesn’t mean that a company will be considered as a good investment only when it pays dividends. Before investing, you should look at different financial tools used in fundamental analysis in addition to DPS payouts to find out the true value of a company.
In order to take a investing decision, you can take help of following financial tools:
Dividend yield
It tells you how much money you are getting in the form of dividend for every dollar/rupee entrusted to the company. To calculate, you need to divide annual DPS by price per share.
You can calculate annual DPS by adding all the dividends paid by the company every quarter and/or annually to shareholders.
Payout ratio
Dividend payouts is calculated by dividing annual DPS with earnings per share (EPS) and then multiplying it with 100.
Some high growth companies prefer to retain higher percentage of the earnings for reinvestment. You have to see company’s reinvestment plan if the payout ratio is not as per industry standards. This is because the company may be planning to invest retained earnings in some other profitable ventures.
As a investor, you need to remember following dates:
Ex-dividend date: Its the date on which you must be a shareholder in order to get the dividend. This date is generally two days prior to the record date. If you have purchased the stock before this date, then you are eligible.
Record date: Its the date on which the company looks at its record to see who all are in the shareholders list. If you are in the shareholders list before the ex-dividend date, then you are eligible.
To get dividend, some investors purchase shares before the ex-dividend date and then sell them after the record date. Payable date is the date on which its paid to you.
