A dividend is a share of a company's profit paid out to its shareholders, usually in cash. When a company earns a profit, it can either keep the money or distribute some of it. The part it distributes is the dividend.
Dividends are not guaranteed. A company's board decides whether to pay one, how much, and when — and it can reduce or stop the dividend in a weak year. In India, many companies pay an 'interim' dividend during the year and a 'final' dividend after the financial year ends.
Four ideas to hold together
| Term | What it means | How it is written |
|---|---|---|
| Dividend per share (DPS) | The cash paid for each share you own | ₹ per share |
| Dividend yield | The dividend as a percentage of the share price | DPS ÷ price × 100 |
| Payout ratio | The share of profit paid out as dividend | DPS ÷ EPS × 100 |
| Retained earnings | The profit kept in the business instead of paid out | Profit − dividends paid |
Dividend numbers are always per share, or relative to profit or price.
Dividend yield = Dividend per share ÷ Share price × 100
Payout ratio = Dividend per share ÷ Earnings per share × 100
Suppose Sunrise Textiles Ltd earns ₹20 per share (its EPS) and pays ₹10 per share as dividend, while the share trades at ₹500. The yield is ₹10 ÷ ₹500 = 2%, and the payout ratio is ₹10 ÷ ₹20 = 50%. The other ₹10 per share is retained in the business.
Dividend Yield & Payout
What a dividend returns relative to the price, and how much of profit is paid out.
Dividend Yield
2%
Payout Ratio
50%
Retained (per share)
₹10.00