|
The dividend history of a company stock talks volumes about the company and its management Adhiraj Sharma
Any investor in the financial markets looks for mainly two kind of returns on investments - one is income from capital appreciation and the other income that he receives intermittently in the form of dividends. It is essentially this ability of a stock to give returns on these accounts that determines any rational investor's decision to hold onto the stock. Past dividend records also have a weightage in determining whether a scrip can be included in the Sensex.  Dividend yield holds prime importance in determining the stock prices. The yield is calculated as the ratio of the annual dividend amount and the prevailing market price of the company's share. The dividend yield ratio shows what investors stand to earn on their shares. Calculating the dividend yield is important to know the true returns from an investment. Also, dividend yield helps analysts in calculating the value of an investment, and whether it is worthwhile to invest in a particular stock. Dividend yield also specifies how much an investor is willing to pay for the expected dividend stream from a single share. An investor can use the expected dividend values over a period or past dividend values for analysis of a company's financial standing.The rate of dividends may vary from company to company, depending on the policies, profits earned, cash flows, investment prospects and so on. Companies declare a certain portion of earnings as dividends. The rest is used in business, to invest and generate higher returns. The accompanying tables show the historical data of dividend payouts of major shipping companies in India. Final dividends are also a function of the future cash requirements of the company. For example, a 10% dividend on a Rs 10 par value equity share means a dividend of Re 1 per share. However, in case an investor has paid Rs 20 to acquire the share, the dividend would also be payable at Rs 10. So, the dividend yield would be five percent and not 10%. A higher dividend announcement indicates higher profitability of the company. Besides, a good dividend track record helps the companies to raise funds easily from prospective investors. At the same time, the management needs to give due consideration to the quantum of dividends rolled out such that the company's financial health is not strained. Dividend allotments are justifiable only when a company is cash-rich and doesn't require funds immediately for implementation of any project. Moreover, a company should distribute dividends only if it is able to generate incremental amount of cash every year. Dividend coverage ratio measures the extent to which a company's earnings support its dividend payments. A dividend coverage of 10 times means the company's profits are 10 times the amount of dividends declared. A higher dividend ratio indicates that the company is not straining itself to give dividends. A good dividend payout highlights the management's confidence in the company's prospects and helps in keeping shareholders' morale high. It gives the company an edge over its competitors in terms of accessibility to the capital market for raising funds. Some companies follow the policy of sustaining dividend payouts or gradually increasing them. These companies demand higher values in the stock markets as compared to the companies following erratic dividend payout policies. Investing for dividends makes sense for many investors.  A good thing about dividends is that they are tax free for the investor. So, in case an investor is holding onto a good number of dividendpaying stocks in his portfolio, he can earn substantial tax-free income. The tax on the dividend is paid by the company itself at the time of declaration of the dividend and shareholders receiving it are not liable to pay any tax on it. The dividend is declared on the par value of the shares. Dividends are payable as a percentage of the face value of the shares. The face value of a share may be anything from Re 1 to Rs 1,000. So, a 1,000% dividend on a Re 1 share amounts to Rs 10 a share. The dividend yield indicates what percentage of the investor's purchase price of a stock is repaid to him. Absolute amount of dividends do not count for this comparison. Many investors who desire to have a regular income by way of dividends look for stocks which either maintain a steady or an upward trend of dividend declaration. They tend to invest in scrips having a high dividend yield. Ideally, a low market price combined with high dividend payout would give high dividend yields. |
