Owning shares is not only about price appreciation. Companies reward shareholders in several ways, and understanding these rewards can improve your overall returns. Those who followed the Reliance Share Price over the years have seen bonus issues and rights offerings reshape holdings. Similarly, shareholders tracking the Tata Steel Share Price have witnessed a stock split and regular dividend payments that changed how their investments looked on paper. Let us unpack what each of these corporate actions really means.
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Dividends: Cash in Your Account
A dividend is a share of the profits distributed to shareholders. Dividends could be interim (paid out during the year) and a final dividend which is declared post-yearly approvals. To claim the dividend, the shareholder must possess the stock before the ex-dividend date
Dividend yield (dividend as a percentage of the market price) is a good metric to compare the returns from different stocks. However, very high yields could be an indicator of falling prices. Look out for the dividend payout ratio and the sustainability of earnings
The dividend received would be taxed in the hands of the investor at applicable slab rates. The company could withhold tax at source.
Bonus shares: more shares, same price
Bonus shares enable shareholders to improve their holdings without any incremental cost. The number of shares increases in the ratio specified by the company against the number of shares held by an investor on the record date. While the shareholding increases, there is an equivalent dilution in the share price
Companies announce bonus shares to indicate that they are confident about future streams of revenue. It is also a method to free up cash by transferring reserves to the share capital. For long-term investors, it is a good way to compound since dividends received would now be on a higher number of shares.
Stock splits: Lower face value, higher volumes?
Announcements of stock splits encourage participation from small investors as the face value of the shares reduces. In a 1:2 split, the face value of a ten-rupee share would now become two rupees, and the investor would get two shares for every one previously held.
While volumes would increase after the split, the value of the investment would remain the same. The price of the share would now decrease since there are more shares in circulation. Reactions to splits are usually positive, and this can lead to increased volumes.
Rights issue and buybacks
Rights issue gives existing shareholders an option to buy new shares issued by the company at a discounted price. The rights are issued against the number of shares held. However, an investor could choose to ignore the rights or trade the same in the market.
Buybacks enable investors to exit shares as the company buys back the same from the market. Buybacks reduce the number of shares outstanding and, therefore, increase earnings per share. Buybacks are a tax-efficient method to reward shareholders. They also indicate that the company believes that the stock is undervalued.
Planning around corporate actions
It is important to keep a watch on various ex-dates, record dates and payment dates. An investor must update the broker about any changes in the demat account, and bank mandate or nomination. In case of an investor’s death, the nominee needs to be appointed as the executor of the will.
Do not buy a stock only to claim a dividend or bonus. The price of the share tends to fall on the ex-dividend date.
Corporate actions are ways in which companies reward shareholders. Understanding them enables the investor to plan on the timing of purchase or sale of the stock. It is also important to remember that fundamentals are important, and the investor must buy the stock based on conviction in the business. Dividends, bonuses, and splits should just be the added benefits. This article is for informational purposes only. It is not to be considered as an investment advisory.
