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Why has the rate of dividend initiation changed overtime

  • It is a term that is of much importance to investors and people who trade in the stock market;
  • On the other hand, established companies try to offer regular dividends to reward loyal investors;
  • Although, EPS is very important and crucial tool for investors, it should not be looked at in isolation.

Earnings per share EPS Definition: Earnings per share or EPS is an important financial measure, which indicates the profitability of a company. It is a tool that market participants use frequently to gauge the profitability of a company before buying its shares. It is a term that is of much importance to investors and people who trade in the stock market. The higher the earnings per share of a company, the better is its profitability.

While calculating the EPS, it is advisable to use the weighted ratio, as the number of shares outstanding can change over time. Earnings per share can be calculated in two ways: It is considered to be a more expanded version of the basic earnings per share ratio.

Although, EPS is very important and crucial tool for investors, it should not be looked at in isolation. EPS of a company should always be considered in relation to other companies in order to make a more informed and prudent investment decision.

Dividend yield is the financial ratio that measures the quantum of cash dividends paid out to shareholders relative to the market value per share.

It is computed by dividing the dividend per share by the market price per share and multiplying the result by 100. A company with a high dividend yield pays a substantial share of its profits in the form of dividends.

Dividend Yield

Dividend yield of a company is always compared with the average of the industry to which the company belongs. Companies distribute a portion of their profits as dividends, while retaining the remaining portion to reinvest in the business.

Dividends are paid out to the shareholders of a company.

Dividend yield measures the quantum of earnings by way of total dividends that investors make by investing in that company. It is normally expressed as a percentage.

Suppose a company with a stock price of Rs 100 declares a dividend of Rs 10 per share. High dividend yield stocks are good investment options during volatile times, as these companies offer good payoff options. They are suitable for risk-averse investors. The caveat is, investors need to check the valuation as well as the dividend-paying track record of the company. Companies with high dividend yield normally do not keep a substantial portion of profits as retained earnings.

Their stocks are called income stocks. This is in contrast to growth stocks, where the companies retain a major portion of the profit in the form of retained earnings and invest that to grow the business.

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Dividends in the hands of investors are tax-free and, hence, investing in high dividend yield stocks creates an efficient tax-saving asset. Investors also take recourse to dividend stripping for tax saving. In this process, investors buy stocks just before dividend is declared and sell them after the payout.

By doing so, they earn tax-free dividends. Normally, the share price gets reduced after the dividend is paid out.

  • While calculating the EPS, it is advisable to use the weighted ratio, as the number of shares outstanding can change over time;
  • By doing so, they earn tax-free dividends.

By selling the share after the dividend payout, investors incur capital loss and then set off that against capital gains. Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders.

  • Dividend yield of a company is always compared with the average of the industry to which the company belongs;
  • After paying its creditors, a company can use part or whole of the residual profits to reward its shareholders as dividends.

Dividends can be issued in various forms, such as cash payment, stocks or any other form. However, it is not obligatory for a company to pay dividend. Dividend is usually a part of the profit that the company shares with its shareholders.

After paying its creditors, a company can use part or whole of the residual profits to reward its shareholders as dividends. However, when firms face cash shortage or when it needs cash for reinvestments, it can also skip paying dividends. When a company announces dividend, it also fixes a record date and all shareholders who are registered as of that date become eligible to get dividend payout in proportion to their shareholding.

The company usually mails the cheques to shareholders within in a week or so. Stocks are normally bought or sold with dividend until two business days ahead of the record date and then they turn ex-dividend.

A recent study found that dividend-paying firms in India fell from 24 per cent in 2001 to almost 16 per cent in 2009 before rising to 19 per cent in 2010. In the US, some of the companies like Sun Microsystems, Cisco and Oracle do not pay dividends and reinvest their total profit in the business itself.

  1. A company with a high dividend yield pays a substantial share of its profits in the form of dividends. However, when firms face cash shortage or when it needs cash for reinvestments, it can also skip paying dividends.
  2. Stocks are normally bought or sold with dividend until two business days ahead of the record date and then they turn ex-dividend. In the US, some of the companies like Sun Microsystems, Cisco and Oracle do not pay dividends and reinvest their total profit in the business itself.
  3. EPS of a company should always be considered in relation to other companies in order to make a more informed and prudent investment decision. Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders.
  4. However, it is not obligatory for a company to pay dividend. Dividends in the hands of investors are tax-free and, hence, investing in high dividend yield stocks creates an efficient tax-saving asset.

Companies with high growth rate and at an early stage of their ventures rarely pay dividends as they prefer to reinvest most of their profit to help sustain the higher growth and expansion.

On the other hand, established companies try to offer regular dividends to reward loyal investors.

  1. Companies with high growth rate and at an early stage of their ventures rarely pay dividends as they prefer to reinvest most of their profit to help sustain the higher growth and expansion. Dividends in the hands of investors are tax-free and, hence, investing in high dividend yield stocks creates an efficient tax-saving asset.
  2. A recent study found that dividend-paying firms in India fell from 24 per cent in 2001 to almost 16 per cent in 2009 before rising to 19 per cent in 2010.
  3. It is normally expressed as a percentage.
  4. The caveat is, investors need to check the valuation as well as the dividend-paying track record of the company. A company with a high dividend yield pays a substantial share of its profits in the form of dividends.