How to generate passive income from dividends?
How to generate passive income from dividends?
If you want to build a portfolio that can hold out against and protect from market volatility, dividend shares can be an effective component to consider. Dividend yields between 4 and 6% with growth potential are an attractive investment because they have already proven to deliver up to 50% of the desired return.

Learn How to generate profit from dividends?

Do you know you can generate a regular passive income from investing? 


Two ways can be found to make money from investing in stocks. 

One of them is very common because everyone is already aware of it. This is when the price of a stock rises, and you sell it and make money. But there is another way, which you will discover in this article, called dividend investing.


If you find companies that are likely to increase their dividends year after year, dividend investing can be profitable. Dividends are one of the most effective ways to generate passive income or even regular income. 


If you have knowledge about stocks and know how to invest in them, dividend investing can be a reliable source of income for most people.


What is Dividend? 

In the form of dividends, a company distributes the profits it has made to its shareholders. Those companies that are profitable have two choices: either they invest all their profits into expanding their business or they distribute a portion of their profits to investors. 

Let's look at an example of earning dividends from a company. 


An annual profit of Rs 100 Crores was made by Company A in 2022, and a dividend of Rs 5 per share was decided. The remainder of the profit will be used for the company's benefit. 

And if you hold 1000 shares of Company A, then you will get 1000 x 5= Rs 5000 as a dividend.


Which companies provide the dividends? 

The tendency of profitable businesses to pay dividends is higher, while startups have a lower likelihood. In mature companies, dividend yields are high.


Dividends are not paid on every stock. There is a possibility that a company that has been paying dividends for some time may cease to do so. In contrast, a company that has never paid dividends can now begin this practice. It is entirely determined by the company's higher authorities. 


In startups, profits are often used to expand the business so they can make more money in the future. As the company grows, investors can also benefit because their invested funds can be converted into a higher digit as well. It benefits its shareholders in two-ways-

  1. The shares soared in price 

  2. Due to the future value of dividends, the company decided to provide dividends in accordance with it.


Who decides the dividend? 

Dividends are declared by the board of directors of the company. Investors will not receive dividends if they are confident of accelerating business growth, and shareholders will not receive dividends if they are uncertain. 


How can we get dividends?

Dividends are paid only by profitable and mature companies, as we discussed above. As such, it is obvious that we should only own shares in companies that are already making money and are stable. Dividends may be paid by an organization as often as it likes during the year.

However, there are a few key points you need to consider when applying for a dividend. Dividend distributions are made according to predetermined dates. 

  1. Board of director's record date determines when the company's books must be entered to be eligible to distribute dividends. You are not eligible for dividends if your name is not listed on the record day. 

  2. In most cases, the ex-dividend date is one business day before record date, as determined by the rules of the stock exchange. A seller of a stock will receive its recently declared dividend if they purchase the stock on its ex-dividend date rather than before it. Ex-dividend dates are the dates on which a stock's price drops by the amount of the declared dividend.


What is the difference between Record Date and Ex-dividend Date?

Let’s understand the difference between Record Date and Ex-dividend Date with the help of an example- 


Declaration Date- April 08

Ex-dividend Date- April 14

Record Date- April 15

Payable Date- May 9

Consider the case where Company A pays a dividend to its shareholders on Friday, April 8. Its board then sets Friday, April 15 as the company's record date. On that date, dividends will be paid to shareholders of record. 

On Thursday, April 14, the ex-dividend date would fall one business day before the record date, which would make it the day before the record date. The dividend will be paid on May 9 to shareholders who purchased shares before Wednesday, April 13. Shareholders of record on April 15 will receive the dividend. The dividend will not be paid to investors who purchase shares after April 14.


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