What is Dividend ? Why the company provides a dividend ?

πŸ§΅πŸ‘‡ A Thread πŸ§΅πŸ‘‡
1/ The dividend is a small amount of money distributed to Equity shareholders from profits made by the company. It is distributed from reserves and surplus. A dividend is calculated on the face value per share of the company.
2/ Suppose, ITC per share face value is β‚Ή2. Last year they declared β‚Ή10 per share which means a 500% dividend paying company.
3/ Why the company provides a dividend ?

A dividend is paid to the shareholders because they have been rewarded for the risk associated with the company. A dividend is one of the important parameters for analysis.
4/ Sometimes dividend are paid because they don’t have sufficient opportunity to reinvest or grow capital which generate high ROE (Return on Equity means own capital). Management thinks as an opportunity cost and they distribute dividends so that It does not draw down ROE & ROCE.
5/ For example, Hawkins. They are continuously providing a dividend to their shareholders because they have not been able to hunt a good investment opportunity. Hawkins is into the cooker business. This industry is a matured industry. Let's take your point of view.
6/ Can you tell me how many Indian houses don't have a cooker? You can check in your household that your mom buy a cooker which is sustainable for a long period like 7-10 yrs. Cooker business is a very slow-moving business. Cooker business doesn’t have a repetitive customer base.
7/ People don’t rush suddenly if any event like a pandemic happens. So, back to the point. Hawkins left with very less opportunity to retain their earnings and invest in their business to grow their business.
8/ While if they keep accumulating retained earnings, they have a major impact on ROE which portrays a wrong image of the business.
9/ So to retain and increase the confidence of the shareholders they provide a dividend which helps to reduce the burden of the company and shareholders increase their Confidence for the company and management.
10/ Taxation - Well before the 2019-20 fiscal budget Dividend Distribution Tax (DDT) was already paid by the company on behalf of shareholders and dividend income was exempted on the tax basis. After 2019-20 dividend income is taxable on income tax slab basis.
11/ So, if your income is β‚Ή5 lakhs and your dividend income is β‚Ή1 lakhs you are obliged to pay taxes on the dividend income.
12/ As you know understood about meaning of dividend with Example. We have also made a Thread on Dividend investing, check-out the following πŸ‘‡

BY :- @pujanshah_15

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