Dividend facets you must know

You people will wonder to know that, the term "dividend" comes from the arithmetic operation of division: a/b=c then a is the dividend, b is the divisor, and c the quotient. Confused, aah yes!

Now let's set out the literal meaning of dividend in relation to equity market, "money for nothing" (great) everyone wish for the same. Wait!!! Dividend is not for everyone, but to those shareholders who owes certain portion of shares in the company.

Dividend is the distribution of earnings from the company to its shareholders for the percentage of money they have invested. It is reward from companies with jolly heart saying "Thank you guys for investing with me".

For example, if your uncle paddy owns 100 shares worth market price Rs. 500 each, he has Rs. 50000 worth of value in the stock. Company decided to thank your uncle with certain cash rewards and provided 20 percent cash dividends. Wow, its great 20% of Rs. 50000, equals to Rs. 10000. Just a minute, 20% not of Rs. 50000 but 20 percent of face value from every stock.

That meant, every companies issued their shares to investors at certain face value, such as Rs. 10, Rs. 100 (Most of the Nepalese companies have face value of Rs. 100). Now if the face value is Rs. 100 of the scrip uncle paddy owes, he will receive Rs. 2000 (20 percent of 100*100).

Dividends are in two forms: cash dividend and stock dividend. Be happy, if you are the shareholders of the dividend distributing company, you get it without any payment burden in your head. Dividends seem great for shareholders, but are dividends good for company? Since, companies can use the earnings for re-investing and step their hands ahead of competitors rather than giving dividends to shareholders. But, on the other side of the fence, there are shareholders who simply get interested in getting "free money" from the company for holding shares in hands even for long periods of time. Therefore, companies decided to attract general shareholders asking to invest in their companies' shares because they endow with attractive dividends. It's just the better way to make shareholders cheerful and retain them with valuable optimism.

Cash dividends refer, giving shareholders the cash amount increasing their pocket size or adding their bank balance. Such dividends are a form of investment income and are usually taxable to the recipients in the year they are paid. This is the most common method of sharing corporate profits with shareholders of the company. At present, Citizens bank International decided to give 10% cash dividends; Nabil proposed 35 % cash dividends, Standard chartered 50%, Nepal Investment Bank 20% and Unilever declared 450 percent cash dividends from the profit fiscal year 2065/66.

However, stock dividends is the dividend given to shareholders the number of shares vis-à-vis to the shares they owned. Let's say, uncle paddy has 100 shares and company decided to provide 50 % stock dividend then your uncle will be entitled with 50 extra shares, now he holds total of 150 shares. Isn't that great? the portfolio surged without any further investment. Currently at Nepalese market Standard Chartered, Nabil bank both decided to provide 50 percent stock dividend from the profit of fiscal year 2065/66.

These sounds cool and interesting, however the dates of dividends have implication to shareholders. Who will receive dividends decides the date of dividends:

Very first, dividends must be approved by a company's BOD every time they are paid on consent of regularity body (NRB in case of FIs). There are basically four important dates to remember regarding dividends.

Declaration date: The BOD meeting propose to provide dividends to shareholders but need to be further approved by NRB and company's Annual General Meeting.

In-Dividend date: It is the last day before the book closing time expires. It meant, if uncle Pady bought on the day, company is liable to pay him dividends they declared. After this date the stock becomes ex dividends.

Ex-Dividend date: The day after the book closure, where all shares bought and sold no longer come attached with the right to be paid the most recently declared dividends. It is relatively common for a stock's price to decrease on the ex-dividends date by an amount roughly equal to the dividend paid.

Payment date: The day when the dividends is exactly paid to shareholders. The payment is adjusted in the balance sheet of the company.


Dividend Implications for companies

Some studies, however, have demonstrated that companies that pay dividends have higher earnings growth, suggesting that dividend payments may be evidence of confidence in earnings growth and sufficient profitability to fund future expansion.

Even though companies' rewards shareholder for the money they had invested in the company, the dividend has certain implications for companies and its balance sheet. Whatever be the dividend types (Cash or Stock) it reduces the retained earnings by the amount of the dividends. When dividend is declared, the money is written in a liability side with a heading ‘dividend payable'. This liability is adjusted when the company actually makes payment on the payments date, usually few days after the ex-dividends date.

In the case of stock dividend (bonus share) even after the amount removed from the retained earnings is added to the paid up capital and issued new shares to shareholders at par value. The par value of each stock does not change, however the outstanding shares is increased, retained earnings is reduced and market capitalization heaved upward.

Price Implications at stock exchange:

Simple formula "if supply exceeds, price slid" and this mechanism is most popular in economy before time of Adam smith and will follow even after the time of Warren Buffet.

When dividend is provided (especially stock dividends), the size on equity surge in the respective ratio. Shareholders until the in-dividends date receives the incentive, however buyer at the ex-dividends date miss out the chance to get dividend decided by companies for that certain year. But even knowing it, why the investors buy at the ex-dividend date? Simply because the price slid as selling spree surge on number of shares augment in the market.

For example, Nabil Bank's BOD declare dividend at 20th August 2009, and closed its book on 8th September 2009. Consequently, the price of Nabil was down from Rs. 4251 to Rs. 2652 at the ex-dividend date. Nabil was providing 50 percent bonus share and 35 percent cash dividend.

Hence, the example illustrates that, the stock price is adjusted by the mechanism of demand and supply at the market by the ratio of dividends declared. For most of the small percentage dividends this is usually not observed amidst the up and down sway of a normal day's trading.

Implications for investors:

Cash dividends: When dividends are paid, individual shareholders in many countries suffer from double taxation of those dividends: the company pays income tax to the government when it earns any income, and then when the dividend is paid, the individual shareholder pays income tax on the dividend payment. In our country also there is double tax is cash dividends. First, companies paid 30% tax (FIs) on net profit to government and the profit after the tax is decided to provide cash dividend. Again, while companies distribute dividends individual investors pays 5% tax on dividend amount.

Bonus dividend: In terms of bonus share, there is no tax levied to investors, however investors have to pay capital gain tax (10%) at the time of selling bonus scrip. If bonus shares are floated in the market than, supply will automatically surge on large outstanding shares hence, price will be adjusted accordingly. Likewise, Earning per shares of the bank on next year will be decrease (Companies have to earn more in the ratio of bonus shares it had distributed earlier for to maintain same EPS) and next year possibility of low cash dividend or bonus shares as well. Many investors viewed dividend as "free lunch" but in fact "there is no such things as free lunch". It's a reward from companies but either adjusted in price of scrip at stock exchange. However, investors need to track the dividends and its implication in their investment portfolio.


"You are your greatest investment. The more you store in that mind of yours, the more you enrich your experience, the more people you meet, the more books you read, and the more places you visit, the greater is that investment in all that you are. Everything that you add to your peace of mind, and to your outlook upon life, is added capital that no one but yourself can dissipate".

Source: Bikash Chaudhary (Jamb Technologies)