Dividend Policy Decisions: Cash Now or Growth Later?
Imagine you own a golden goose. Every month, this goose lays a golden egg (Profit). You have two choices:
- Take the egg (Cash): Use it to pay bills, buy a car, or enjoy life.
- Feed it to the goose (Reinvest): Let the goose eat the gold so it grows bigger and lays even bigger eggs next year.
This is exactly the dilemma companies face with Dividend Policy . Should they distribute profits to shareholders as Dividends (Cash Now) or keep the money as Retained Earnings to expand the business (Growth Later)?
The Bottom Line: Dividends are your share of the profit paid directly to your bank account. It is the only "real" cash return you get without selling your shares.
1. What is a Dividend?
A dividend is a reward paid to shareholders for their investment in a company's equity. It usually comes from the company's net profits.
- Cash Dividend: Money deposited directly into your bank account. (Most common).
- Stock Dividend (Bonus Issue): Additional free shares given instead of cash.
2. Important Dividend Dates (Don't Miss Out!)
Many beginners buy a stock thinking they will get the dividend, only to be disappointed. You must understand the timeline.
Declaration Date
The company announces: "We will pay ₹5 per share."
Ex-Dividend Date (Critical!)
The Cutoff Day. You must buy the stock *BEFORE* this date to get the dividend. If you buy on or after this date, the previous owner gets the money, not you.
Record Date
The company checks its records to see who owned the shares on the Record Date (usually 1 day after Ex-Date due to T+1 settlement).
Payment Date
Ka-ching! The money hits your bank account.
3. The Great Debate: To Pay or Not to Pay?
Why do companies like Google (Alphabet) and Amazon pay ZERO dividends, while companies like ITC and Coca-Cola pay huge dividends?
A. The "Bird-in-the-Hand" Theory
"A bird in the hand is worth two in the bush."
Investors prefer certainty. Dividends are certain cash (bird in hand). Capital gains (stock price going up) are uncertain (two in the bush). Therefore, paying dividends increases the company's value because investors feel safer.
B. The Growth Theory (Retained Earnings)
If a company can earn a 20% return by reinvesting its profits into a new factory, why should it pay you a dividend? You might only earn 6% in a bank FD. It's better for the company to keep the money and grow it for you. This is why high-growth tech companies rarely pay dividends.
C. Modigliani-Miller (MM) Irrelevance Theory
In a perfect world (no taxes, no transaction costs), it doesn't matter if a company pays dividends or not. If they pay ₹10 dividend, the stock price drops by ₹10. Total wealth remains the same. It's like taking money from your left pocket and putting it in your right pocket.
4. Key Metrics to Watch
Before you buy a "Dividend Stock", check these numbers:
Dividend Yield
Formula: (Dividend per Share / Stock Price) × 100
This tells you the return on investment from dividends alone. If a stock is ₹100 and pays ₹5 dividend, Yield = 5%.
Payout Ratio
Formula: (Dividends / Net Income) × 100
How much of the profit is being shared? A ratio of 50% is healthy. A ratio of 90% or more is dangerous—the company isn't keeping enough money to grow.
5. Who should buy Dividend Stocks?
- Retirees: They need a steady monthly/yearly income to pay bills. Dividend stocks act like a pension.
- Conservative Investors: Dividend-paying companies are usually mature, stable, and less volatile than growth stocks.
- Bear Markets: When the stock market is crashing, dividends provide a cushion of safety.
Frequently Asked Questions
What is a Dividend?
A dividend is a portion of a company's profit that is distributed to its shareholders. It is essentially a reward for owning the stock, usually paid in cash directly to your bank account.
What is the Ex-Dividend Date?
The Ex-Dividend Date is the cutoff day. You must own the stock *before* this date to receive the dividend. If you buy shares on the Ex-Date or after, the dividend goes to the previous owner.
Why do companies like Google not pay dividends?
Growth companies prefer to reinvest 100% of their profits back into the business (Retained Earnings) to fund expansion, R&D, and acquisitions. They believe this will increase the share price, giving investors better returns through capital gains.
Is a high dividend yield always good?
Not always. A yield might be high simply because the stock price has crashed due to bad news. Always check the Payout Ratio and the company's financial health before chasing high yields.