Investing in the stock market can be a lucrative venture, but it's crucial to understand various aspects of it to make informed decisions. Two important elements that directly impact shareholders are dividends and bonuses. In this blog, we'll delve into these topics, providing you with crisp and easy-to-understand information.
What is Announcement Date of Dividend and Bonus?
Dividend and Bonus Announcement Dates are crucial events for shareholders. They offer insight into a company's financial health and its willingness to reward investors. Dividends are payments made by companies to their shareholders out of their profits. These payments are usually made quarterly, but some companies pay them annually or semi-annually. The dates on which dividends are announced are typically published on the company's website or in the financial press. While bonuses grants are additional shares. Understanding when these events occur can help you plan your investment strategy.
What is Record Date of Dividend and Bonus?
The record date is the date on which shareholders must be registered in order to be eligible to receive a dividend. Shareholders who are not registered on the record date will not receive a dividend, even if they owned shares of the company on the date that the dividend was announced. To be entitled to dividends or bonuses, you must own the stock on or before the record date. This date is set by the company's board and is essential to track for timely investment decisions.
What is Ex-Dividend Date or Ex-Bonus Date?
Ex-Dividend / Ex-Bonus Date is a date before which (one day before ex-dividend date) you need to purchase the stock to get dividend paid or bonus shares allotted. As per the stock exchange clearing and settlement timelines, it usually takes two days to get the shares credited to your demat account. So, if you want to held securities on Record Date to earn dividend, you need to purchase the stock at least three days before the Record date. Thus, Record Date minus two days (T-2) is the Ex-Dividend date.
Should You Buy Stocks Before Ex-Dividend Date to Earn Dividend Benefits?
Retail Investors normally decide to buy the stocks before the Ex-Dividend Date to earn dividend from the stock. However, this approach may not lead you to much gains / profits because once the dividend is declared, stock is trading at Cum-Dividend means its Share Price includes the element of Dividend Amount per Share to be paid in coming days. So once the ex-dividend date passes, the price of stock is tent to fall to the extent of dividend amount to be paid to shareholders. Thus, this fall in price compensates the Dividend Amount received by the shareholder and thus it does not result in gain to the shareholder by doing short-term investment with a goal to earn dividend income. However, fall in prices depends on market sentiments and prices of shares may or may not fall after ex-dividend date. Below is simple example to illustrate above understanding
If Asian Paint has announced Rs 50 per Share Dividend on 20th October, 2023 and record date is 4th November than Ex-Date is 2nd November 2023. If Price of Asian Paint on one day before Ex-Dividend Date i.e 01st November is Rs 1000 than logically and in most cases price of Asian Paint on 02nd November will fall to Rs 950 (assuming all other factors remain constant). So it is said that between 20th Oct to 01st Nov shares were trading Cum-Dividend and from 02nd Nov, 2023 shares are trading Ex-Dividend.
What is Long-Term Impact of Dividend and Bonus Announcement on Share Price?
The announcement of dividends and bonuses can have a significant impact on a company's share price. Let's explore this in detail:
Dividend Impact:
Positive Signal: A dividend announcement often signals a company's financial stability and investor confidence, potentially boosting the stock price.
Dividend Yield: Investors may flock to dividend-paying stocks to secure regular income, causing demand to increase.
Bonus Impact:
Issues of Bonus Shares do not have any direct or logical impact on the total market cap of the company although prices may slash exactly in ratio of bonus shares issued but that do not affect the total holding, total gain or loss on shares. Normally Bonus Shares are issued to reduce the price per share and improve liquidity of the stock
High Dividend Paying Stocks
Investors often seek high dividend-paying stocks to secure a steady income stream. When considering such stocks, keep the following in mind:
Your Investment Goals: Determine whether regular income or capital appreciation aligns with your financial objectives. Capital Appreciation in high dividend paying stock is less
Dividend yield: The dividend yield is the percentage of the share price that is paid out as a dividend. A higher dividend yield is generally more attractive to investors.
Growth prospects: The growth prospects of the company are also important to consider. Investors may be willing to accept a lower dividend yield if they believe that the company has the potential to grow its earnings in the future.
Financial health of the company: The financial health of the company is another important factor to consider. Investors should avoid investing in companies that are financially weak, as they may not be able to sustain their dividend payments in the long term.
There are a number of companies that pay high dividends to their shareholders. Some of the most popular high-dividend paying stocks include:
Coal India Ltd.
Vedanta Ltd.
Power Finance Corporation Ltd.
GAIL (India) Ltd.
Hindustan Zinc Ltd.
ITC Ltd.
Income Tax on Dividend and Bonus Shares
Taxes play a significant role in your investment returns. Here's how they affect dividends and bonuses:
Dividends are taxed as income in the hands of the recipient. The tax rate on dividends will vary depending on the individual's tax bracket. Under Section 56(2)(i) of the Income Tax Act of 1961, an ordinary dividend is taxed at the standard slab rates applicable to the shareholder's income. If a shareholder's total dividend income in a single financial year exceeds Rs. 5,000, he or she has to pay a tax deducted at source (TDS) of 10% (plus surcharge and cess) under Section 194 of the Income Tax Act, 1961. The shareholder can claim the TDS as a credit on his or her income tax return.
Bonus shares are not taxed at the time of issue, but they may be subject to capital gains tax when they are sold. As the Cost of Acquisition (Purchase Price) is Nil, thus full amount received on sale of bonus shares will attract tax. Bonus Shares may attract Long Term Capital Gain or Short-Term Capital Gain on basis of period of holding. If shares are held for more than one year than it attracts Long Term Capital Gain and tax rate will be 10% and if shares are held for less than 1 years than tax will be 15%. Period of Holding will be calculated from the date of allotment of bonus shares upto date of sale
Conclusion:
In summary, comprehending dividend and bonus-related matters is vital for all stock investors, as these factors wield significant influence over financial outcomes. While dividend and bonus announcements are key considerations, it's crucial to remember that they are only one part of the investment puzzle. Evaluating a company's financial strength, growth potential, and dividend yield are equally essential aspects to weigh in your investment decisions.