While trading in the market, we usually come across news that sone XYZ company has declared dividends.
Can we make some immediate profits with such news??
Let’s understand everything in detail.
What is a dividend?
Logically, Shareholders are partners of the corporation. So, they have equal rights to the profits made by that corporation in a quarter or be it annual. Thus, the dividend is the distribution of profits made by a corporation to its shareholders.
Here it is to be noted that all corporations do not declare dividends, even if they make profits. This is because the corporation re-invests the gain in its business to expand or clear existing dues, which in turn benefit the shareholders as the corporation seeks to make more profit in the future.
Public companies usually declare dividends at fixed schedules; they might also declare special dividends, showing that the company is doing better than expected, which in turn boosts investors’ morale.
It should be noted that when a company declared dividends, it is given on the Face Value of shares and not on the Current Market Price (CMP) of shares. For eq, If XYZ company shares are trading at 100rs and its face value is 1rs. If XYZ declares a dividend of 100%, it means shareholders will get 100% of Face value, i.e., 1rs per share.
To make profits from dividends, we must understand the dividend timeline correctly;
- Declaration date: The board of directors announces dividend payment. This is the date when the company declares its dividend. It occurs well in advance of the mortgage.
- The ex-dividend date (or ex-date): The stock starts to trade without the dividend. This is the cut-off day for being eligible to receive the dividend payment. It’s also the day when the stock price often drops in accord with the declared dividend amount. Traders must purchase the stock before this critical day. You will not receive a dividend if you buy stock on this particular day.
- Date of record: Current shareholders on registration will receive a dividend This is the day when a company record which shareholders as eligible to receive the bonus.
- Pay date: This is the day when the dividend is paid, and the company issues dividend payments.
Here, it should be noted that; it takes T+2 business days for a trade to complete. So, considering this, there is a gap of exactly two business days between the Ex-dividend date and record date.
Strategy to make profits:
The strategy is straightforward, it is widely known as “Dividend Capture.”
The dividend capture strategy is based on an investment technique that focuses on quickly capturing the dividend issued by a corporation, without intending to hold the investment over a long period.
It simple because the trader does not have to go through technical and fundamental analysis to execute dividend capture effectively. A trader or an investor purchases shares of a company after the dividend is declared. Usually, it is done a couple of days before the ex-dividend date. On the ex-dividend date, traders sell the stocks. Thus, they end up getting up declared dividends and also capitalize on any price gain from the shares.
Let’s understand with a recent example:
ITC declared a 10.15rs dividend per share on 26 June 2020. The Record date was set to be 9 July. So, traders had to buy it on or before 7 July to get dividends of the same. The dividend will be credited to shareholders’ accounts on 8 September.
1. Once the dividend is declared, share prices surge upwards to consolidate the number of bonuses.
Let’s consider the ITC example again.
As we can see, ITC gained nearly 14rs from the declaration date to the ex-dividend date. After ex-dividend, the stock fell back to its average trading value and continues to trade further. So, timing the entry and the exit of stocks is significant.
2. Brokerage charges and Depository charges are also to be considered while planning to capture a dividend.
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3. Few countries may charge taxes on income via dividends. Fortunately, India has exempted income by profits from taxable income.
Dividend Capture Opportunities in near Future:
|Kemp and Co||5.00||29-06-2020||–||21-09-2020|
|The Indian Wood||5.00||03-07-2020||–||17-09-2020|
|South (I) Paper||15.00||25-06-2020||–||28-08-2020|
|Tide Water Oil||2800.00||24-06-2020||–||21-08-2020|
|ADC India Comm||20.00||20-05-2020||–||19-08-2020|
|Lumax Auto Tech||50.00||17-06-2020||–||19-08-2020|
|Can Fin Homes||100.00||15-06-2020||–||18-08-2020|
|NGL Fine Chem||35.00||29-06-2020||07-08-2020||06-08-2020|
|YASH PAKKA LTD||10.00||22-06-2020||07-08-2020||06-08-2020|
|SOLARA ACTIVE P||20.00||07-05-2020||–||28-07-2020|
The percentage of dividend is on the Face value of stocks and not the CMP of shares.
Investing in the equity market has the risk of losing capital. The author is not a SEBI registered Advisor. Please do your research before investing directly in the market.