Have you ever wanted extra money in your bank account regularly? Apart from your salary or business earnings? What if you could buy stocks that not only go up in value but also provide steady cash without much effort? Seems too good to be true? It’s real.
If an additional income stream can boost your financial security and improve your lifestyle, exploring ‘dividend income’ could be the right move for you.
What is dividend income?
The dividend is a portion of the profits made by a business distributed to its investors. Typically issued quarterly, these payments are decided by the board of directors.
Not all businesses distribute dividends. Those that do often attract individuals seeking stable income. Companies known for consistent payouts usually exhibit lower volatility compared to the broader market, providing a cushion for stakeholders.
Dividend income is the return you earn from these distributions. It represents a return on your investment in the company. This income can be a crucial part of a financial strategy, especially for those relying on regular cash flow.
For example, assume a business that made ₹1k crore in profit last year. It reinvested 75% for growth. With a strong financial position and ample cash reserves, it chose to distribute the remaining ₹250 crore to shareholders as dividends.
To know more: A guide to stock dividend
Benefits of dividend income
- The additional payout gives you part of the sum you invested in a company. This lowers your risk. Unlike stock prices, dividends don’t change as much when the market is unstable.
- As noted earlier, the organisations that are in a position to pay dividends regularly are usually in good financial health. Such firms are often profitable with stable revenues. This reliability can boost investor confidence and might even lead to higher share prices.
- The income provides a steady stream of passive earnings. This extra money can enhance your financial standing. Over time, it might match or even exceed your regular salary.
- Immediate cash flow is another benefit of dividend income. You can use this money as soon as you receive it, which is helpful in combating inflation. Having cash on hand maintains your purchasing power.
Types of dividend
Cash dividend
A cash dividend is straightforward. The issuer pays out profits directly to shareholders in cash. Say if a firm announces a ₹20 apiece dividend and you hold 150 shares, you get ₹3k effortlessly. Payments can be quarterly, semi-annual, or annual.
Stock dividend
Some companies choose to increase your stocks instead of cash compensation. This way the business cash remains intact while still rewarding investors. Suppose a company declares a 10% stock dividend. You’re eligible for an extra 100 stocks for the 1000 you own.
Property dividend
Property dividends are less common and involve distributing assets or property to shareholders. These might include physical assets like inventory or real estate. For example, a real estate company might distribute rental units to its shareholders, giving them direct ownership.
Scrip dividend
Here, the corporate issues extra shares or vouchers that can be redeemed for shares in the future. This is similar to stock dividends but offers flexibility. Say you hold 5k shares. For a 10% scrip dividend, you are bound to get 500 vouchers. The excess can be converted into shares later.
Liquidating dividend
The distribution occurs when a company shuts down. Unlike regular dividends, these come from the company’s left over assets after settling debts. Picture a firm closing with ₹10 million in assets. This sum gets distributed as dividends.
Special dividend
Special dividends are one-off payments made in exceptional circumstances. These aren’t regular occurrences. Like if the business doesn’t need the money for immediate operational needs, after a particularly profitable year or after selling a significant asset.
Also read: Cash dividend vs stock dividend – Which one is better?
How to earn dividend income?
Start by picking solid, dividend-paying stocks. Focus on companies with a strong record of regular payouts. Look into mature industries like pharmaceuticals or FMCG for reliable options.
Invest through a reputable stockbroking platform that provides tools and real-time data. Diversify your portfolio across different sectors to minimise risk.
Mutual fund is another option. Go for funds focused on dividends. Check your portfolio often. Make sure it matches your financial goals. Being patient and disciplined is important for dividend investing.
You may also like: Dividend Reinvestment Plans (DRIPs) for long-term wealth creation!
Dividend income tax rate
Dividend income is taxable in India. For individuals, it is taxed according to their income tax slab rates. Plus, it is subject to TDS, i.e., Tax Deducted at Source. However, tax exemption on dividend income is there up to ₹5,000 in a financial year. If it surpasses the limit, the dividend issuer will deduct a 10% TDS on dividend income.
Hence, if you receive ₹6k as dividends, ₹600 will be taken TDS, and you will get ₹5,400. Non-residents face double the rate. It is subject to double taxation avoidance agreements.
Bottomline
Gains through dividends can give an avenue for steady flow of passive earnings, boosting financial stability. By picking dependable dividend-paying stocks and understanding surcharges on dividend income, one can excel from this strategy.
FAQs
- What is an example of a dividend income?
Let’s assume you hold 100 shares of a listed company. The business decides to reward its shareholders by paying ₹10 extra for each share. So, you get ₹1,000 in total. This extra money comes to you just for holding their shares. This is a cash dividend. Based on the type of payment, like additional stocks, the dividend changes. It’s like getting a bonus for investing in the company, adding a nice boost to your bank account.
- How to get dividend income?
Start by buying shares of companies that are regular in this game. Look for businesses with a good track record. Diversify and in regular check your investments to make sure they’re in line with your financial goals. You can also consider reinvesting dividends to increase your shareholding and grow your income over time.
- Are dividends taxable income?
Yes, they’re very much taxable. When you receive dividends, they get added to your total income. You pay tax on them based on your income tax slab. If your dividends exceed ₹5,000 in a year, the company will deduct 10% TDS before paying you. Non-residents have different rules and may face higher TDS rates.
- Is dividend income an asset?
Dividends are transactions between the company and you. When shareholders get dividends, it feels like they have gained an asset because their net worth has increased. When you receive one, it is added to your cash balance rather than being treated as an asset in and of itself. The business, on the other hand, is a liability until paid.
- Is dividend tax free in India?
Dividends aren’t tax-free in India. The government actually taxes them at your individual tax rate. If your dividend income exceeds ₹5k in a year, a 10% TDS is deducted by the company before payment. Non-residents may face double the TDS rates at 20%.
