What Is a Dividend?

A profitable company has a choice. It can reinvest profits into new projects, pay off debt, or return some cash to its owners, the shareholders. Mature companies with steady profits and fewer growth opportunities often pay larger dividends. Fast-growing companies often pay little or nothing, preferring to reinvest.

The company board recommends the dividend, and for final dividends, shareholders approve it at the annual meeting. Companies may also pay interim dividends during the year. The amount can change from year to year, and a company can cut or skip dividends if profits fall.

Dividends are announced as an amount per share. If a company declares Rs 5 per share and you own 100 shares, you receive Rs 500, before any applicable tax. These figures are only an illustration.

Record date: the date on which you must be a registered shareholder to receive the dividend.

Ex-dividend date: the date from which buying the share no longer gets you the upcoming dividend. In India, with quick settlement, the ex-date is usually close to the record date.

Payment date: when the money actually reaches shareholders bank accounts.

When a company pays out cash, it has less cash afterwards. So on the ex-dividend date, the share price usually falls by roughly the dividend amount. Your total wealth, shares plus dividend, stays about the same right after the payout.

This is why a dividend is not free money. It is part of the company value being handed to you.

Dividend yield compares the yearly dividend with the share price. A higher yield means more dividend for each rupee of share price. But a very high yield can sometimes signal that the share price has fallen because of problems, so it needs context.

Our page on dividend yield funds explains funds that focus on such companies.

Over long periods, reinvested dividends add meaningfully to total returns. That is why fund performance is compared with the total return index, which includes dividends, rather than the price index alone.

Our page on TRI explains this.

When companies held by a mutual fund pay dividends, the money goes into the fund. In the growth option, it stays invested and adds to the NAV. In the IDCW option, the fund may pass some of it, along with other gains, back to investors.

Our page on how mutual funds make money explains the sources of fund growth.

IDCW stands for income distribution cum capital withdrawal. The name was changed from "dividend" to make clear that the payout can include your own capital. When an IDCW payout happens, the NAV falls by the same amount. You receive cash, but your units are worth less.

Our page on growth versus IDCW explains why many investors prefer the growth option.

Funds decide when and whether to make IDCW payouts. They are not fixed or scheduled like interest. If you need regular income, an SWP from a growth option is usually more predictable.

Our page on SWP explains how it works.

Dividends from shares and IDCW payouts from mutual funds are generally taxed as income in the hands of the investor, depending on the rules at the time. Growth options are taxed only when you redeem. We do not quote tax rates. A tax adviser can explain your situation.

Our page on mutual fund taxation explains the structure.

Some mutual funds offer an IDCW reinvestment option, where the payout buys more units of the same fund instead of coming to you as cash. The overall effect is similar to the growth option, with more paperwork.

Our page on mutual fund units explains how units change.

High-dividend shares can provide cash flow, but chasing yield alone can lead to owning companies with weak growth or troubled finances. Total return, which combines dividends and price growth, is what matters over time.

Retirees often like the idea of dividend income. Since dividends are not fixed, relying only on them can make income uneven. Many retirees use a planned SWP from a balanced portfolio instead, for steadier cash flow.

Our page on passive income from mutual funds explains this approach.

Companies can also return cash by buying back their own shares. Fewer shares can mean each remaining share represents a bigger slice of the company. Buybacks and dividends are two ways of sharing profits with owners.

• "A dividend is extra income on top of my investment." The share price or NAV usually drops by about the same amount.
• "High dividend means a good company." Not always; check why the yield is high.
• "IDCW funds give regular income." Payouts are not fixed or promised.

Our page on mutual fund myths covers more misunderstandings.

Company announcements on stock exchange websites list past dividends, record dates and amounts. Fund fact sheets list past IDCW payouts for each scheme. Past payouts do not tell you what future ones will be.

• Dividend: a share of company profits paid to shareholders.
• Price drops by about the dividend on the ex-date.
• IDCW in funds comes out of the fund value.
• Total return matters more than dividends alone.

We are distributors rather than investment advisers and we recommend no schemes. If you want help choosing between growth and IDCW options, get in touch.