How to make money from the dividend payout in stock market?

Dividend
Dividend basically is an incentive or reward in the form of cash, stock or any other form by the company to its shareholder. A dividend is a part of company’s profit, which it shares with their shareholders (so-called owners). The dividend can be paid even if the company has not made any profit during the year. Dividend to be paid is decided by the board of directors & is approved by the shareholders at the Annual General Meeting. However, payment of dividend is not mandatory by any company.

The dividend is paid on the face value of shares. For example, if the Face Value on the stock of a company is Rs.10 and the company paid a dividend of 200%, then the dividend amount comes out to be Rs.20. As we have discussed above, the decision to pay a dividend is decided by Board of Directors at the AGM, however, the dividend is not paid as soon as it is announced. Now the question arises is when the dividend is actually paid & who all are entitled to receive it? To understand this we just need to understand few terms:

Dividend Declaration date: This is the date when the AGM is held, the dividend is declared & approved.

Record Date: Being the most important date. This is the date set by the company on which the shares must be held by the investor in order to be eligible for the dividend.

Ex-Date or ex-dividend date: The Ex-date is usually A business day before the record date. This is because Indian stock market follows a T+2 day of settlement cycle.

Dividend Payout Date: Date on which dividends are actually paid out to shareholders listed in the register of the company.

Now let us understand the above terms with the help of an example:

If the record date is 4th Nov, then the investors whose name appeared in the register as on 4th Nov would be entitled to dividend payments. The ex-date, in this case, would be 3rd Nov. Therefore the shareholders holding shares on or before 2nd Nov would be entitled to the dividend. The Ex-dividend date i.e. 3rd Nov is the date when the seller, & not the buyer (new buyer), will be entitled to receive the dividend. So, you should not buy on this date if you want to earn the dividend.

As soon as the stock goes Ex-Dividend on the Ex-Dividend Date, it is usually seen that the stock prices are dropped to the extent of dividend paid. The logic behind this fall is because the amount with which the company paid the dividend, no more belongs to it. For example if Infosys share price was 800 before ex-date & the dividend paid is 200% on the face value of Rs 10, in that case, dividend amount comes out to be Rs 20, and accordingly, the share price will drop almost by Rs 20 & will come down to around Rs. 780.

Now the question is how to make money in the Indian stock market from the dividend payout.

Usually, the price of a stock starts rising as the record date (for the dividend payout) approaches near and near. This is because the investors want to buy the stock to earn a dividend on the dividend payout date. Even if you don’t want to earn from dividend still you can think of buying the stock as most probably the price of the stock will keep rising till the record date approaches. Then either you can sell the stock at the time when you realize that you are making enough from the price rise or you can sell on the Ex-Dividend Date to earn dividend as well. As said before, you are still entitled to get the dividend even when you sell the stock on the Ex-Dividend Date. Make sure to quickly sell as soon as the market opens on the Ex-Dividend Date to maximize your profit from both the price rise and the dividend itself as the stock price will tend to go lower and lower on the Ex-Dividend Date when the shareholders, who only wanted to make money from the dividend payout and not interested in long-term investment, will sell.

To know about the companies who have declared the dividend recently and their record dates and ex-dividend dates you can visit this page on moneycontrol.com. This is really all you need to start making money from the dividend payout.

But there is also a slight risk involved in this method of making money. If the overall sentiment of the market is not good then the stock price may even fall before the dividend payout date. In that case, though you can make money from the dividend payout, but as the price of the stock has fallen it may give overall loss as well unless you don’t want to sell immediately and wait till the bought price comes back again.

Written By: Yogesh Lohia, Senior Editor at sharemarkethow.com.

Disclaimer: All the information compiled and presented here on this site is based on our financial background knowledge, years of practical experience, and recent research. But still we are not legally authorized to recommend stocks and so the information should be taken as our personal views only.