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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Dividend facts you may not know

Dividend facts you may not know

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1Dividend facts you may not know Empty Dividend facts you may not know Mon Feb 11, 2013 12:30 am

sriranga

sriranga
Co-Admin
‘Money for nothing’ is not only the title of a song by Dire Straits from the ‘80s, it is also the feeling many investors get when they receive a dividend. All you have to do is buy shares in the right company and you’ll receive some of its earnings. How exciting is that? Despite the advantage, however, there are several implications involved in the paying and receiving of dividends that the casual investor may not be aware of. This article will explain several of these. But first, let’s begin with a short primer.

What are dividends?
Dividends are one way in which companies ‘share the wealth’ generated from running the business. They are usually a cash payment, often drawn from earnings, paid to the investors of a company - the shareholders. These are paid annually more commonly, with interim payments. The companies that pay them are usually more stable and established, not ‘fast growers’. Those still in the rapid growth phase of their life cycles tend to retain all the earnings and reinvest them into their businesses.

When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward nearly by the amount of the dividend by the exchange on which the stock trades. For most dividends, this is usually not observed amidst the up and down movements of a normal day’s trading.

The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company and this is reflected by a reduction in the company’s market cap. Instead, it belongs to the individual shareholders. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so the exchange adjusts the price downward to reflect this fact.
Dividends are generally subject to withholding tax at 10 percent of the gross dividend.

Implications for companies
Dividend payments reduce retained earnings by the total amount of the dividend. The money is transferred to a liability account called dividends payable. This liability is removed when the company actually makes the payment on the dividend payment date, usually a few weeks after the ex-dividend date. For instance, if the dividend was Rs.3 per share and there are 150 million shares outstanding, retained earnings will be reduced by Rs.450 million and that money eventually make its way to the shareholders.

Power of dividend growth
Many investors think of dividend-paying companies as boring, low-return investment opportunities. Compared to high-flying small cap companies, whose volatility can be pretty exciting, dividend-paying stocks are usually more mature and predictable. Though this may be dull for some, the combination of a consistent dividend with an increasing stock price can offer earnings potential powerful enough to get excited about.

High dividend yield
Understanding how to gauge dividend-paying companies can give us some insight into how dividends can pump up your return. A common perception is that a high dividend yield, indicating the dividend pays a fairly high percentage return on the stock price, is the most important measure; however, a yield that is considerably higher than that of other stocks in an industry may indicate not a good dividend but rather a depressed price (dividend yield = annual dividends per share/price per share). The suffering price, in turn, may signal a dividend cut or, worse, the elimination of the dividend.

The important indication of dividend power is not so much a high dividend yield but high company quality, which you can discover through its history of dividends, which should increase over time. If you are a long-term investor, looking for such companies can be very rewarding.

Dividend payout ratio
The dividend payout ratio, the proportion of company earnings allocated to paying dividends, further demonstrates that the source of dividend profitability works in combination with company growth. Therefore, if a company keeps a dividend payout ratio constant, say at 4 percent, but the company grows, that 4 percent begins to represent a larger and larger amount. (For instance, 4 percent of Rs.40, which is Rs.1.60, is higher than 4 percent of Rs.20, which is 80 cents).

Let’s demonstrate with an example: Let’s say you invest Rs.10,000 into XYZ Company by buying 100 shares, each at Rs.100 per share. It’s a well-managed firm that has a P/E ratio of 10 and a payout ratio of 20 percent, which amounts to a dividend of Rs.2 per share. That’s decent, but nothing to write home about since you receive only a measly 2 percent of your investment as dividend.

However, because of great management, the company expands steadily, and after several years, the stock price is around Rs.200. The payout ratio, however, has remained constant at 20 percent and so has the P/E ratio (at 10); therefore, you are now receiving 20 percent of Rs.20 in earnings, or Rs.4 per share. As earnings increase, so does the dividend payment, even though the payout ratio remains constant. Since you paid Rs.100 per share, your effective dividend yield is now 4 percent, up from the original 2 percent.

Now, fast forward a decade: XYZ Company enjoys great success. The stock price keeps appreciating and now sits at Rs.150 after splitting two for one three times.

This means your initial Rs.10,000 investment in 100 shares has grown to 800 shares (200, then 400 and now 800 shares) worth a total of Rs.120,000. If the payout ratio remains the same and we continue to assume a constant P/E of 10, you now receive 20 percent of earnings (Rs.12,000) or Rs.2,400, which is 24 percent of your initial investment! So, even though XYZ’s dividend payout ratio did not change, because of company growth, the dividends alone rendered an excellent return - they drastically increased the total return you got, along with the capital appreciation.

Bottom line
Dividends might not be the most attractive investment strategy out there. But over the long run, using time-tested investment strategies with these ‘boring’ companies can achieve considerable amounts of returns.

(Reference: Investopedia)
http://www.dailymirror.lk/business/features/25646-dividend-facts-you-may-not-know.html

http://sharemarket-srilanka.blogspot.co.uk/

2Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 12:47 am

takefawaz


Senior Equity Analytic
Senior Equity Analytic
Hi Forum,

I dont want to open a new thread for my question.

When we calculate 'Net Asset Value/Share' and EPS, do we have to include non-voting shares in the formula?

3Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 8:08 am

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
@takefawaz wrote:When we calculate 'Net Asset Value/Share' and EPS, do we have to include non-voting shares in the formula?
Yes, we have to include non-voting shares (in the denominator). NV shareholders are also part-owners of the company, but without voting rights.

4Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 8:36 am

Chinwi

Chinwi
Associate Director - Equity Analytics
Associate Director - Equity Analytics
Yes for both. They also get dividends. Assets value in the company and the returns are distributed / diluted among voting and non-voting.

5Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 12:12 pm

takefawaz


Senior Equity Analytic
Senior Equity Analytic
Thanks guys.

6Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 2:30 pm

hasintha

hasintha
Senior Equity Analytic
Senior Equity Analytic
nice article

http://hasi-journal.blogspot.com

7Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 2:34 pm

bakapandithaya

bakapandithaya
Vice President - Equity Analytics
Vice President - Equity Analytics
Thnkx 4 sharing

8Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 3:43 pm

nalaka_sg


Manager - Equity Analytics
Manager - Equity Analytics
how we can find out the dividend paying period of the companies (before they announce it.) so we would able to buy share before announcement Very Happy

9Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Feb 11, 2013 11:05 pm

takefawaz


Senior Equity Analytic
Senior Equity Analytic
Even after the announcement you have couple of weeks to buy before XDate. Only thing is price may go higher.

10Dividend facts you may not know Empty Re: Dividend facts you may not know Tue Feb 12, 2013 12:33 pm

raptor


Manager - Equity Analytics
Manager - Equity Analytics
@nalaka_sg wrote:how we can find out the dividend paying period of the companies (before they announce it.) so we would able to buy share before announcement Very Happy

Thats a free lunch and as we all know, there is no free lunch, unless you have inside information!

11Dividend facts you may not know Empty Dividends Mon Jul 27, 2015 1:07 am

nis2010


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
What is the meaning of this "Shareholder Approval: – Required"

12Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Jul 27, 2015 9:12 am

lossorgain

lossorgain
Manager - Equity Analytics
Manager - Equity Analytics
@nalaka_sg wrote:how we can find out the dividend paying period of the companies (before they announce it.) so we would able to buy share before announcement Very Happy    

Well there's no secret formula but by looking at the timelines normally they have been paying in past (you can view those in CSE site for the company) you'll be be able to fairly guess when a dividend announcement would be and when it would be paid. It's normally the usual period, probably one or two weeks apart. 

On a different note great article on dividends although I doubt if I'd have the patience to wait for a decade  Very Happy

13Dividend facts you may not know Empty Re: Dividend facts you may not know Mon Jul 27, 2015 10:47 pm

charith82


Manager - Equity Analytics
Manager - Equity Analytics
Nice Article. Yes If you track back historic dividend announcement period of each and every stock you can have a fair guess of future announcements.As i know some of the brokers research departments doing that and sending notifications to their clients

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