dividends
A dividend is not free money
The rule
On the ex-date the price falls by roughly the dividend, so a payout mostly hands you back your own money, minus tax.
Where it flips
A high dividend feels like extra income on top of your holding. Where it misleads: you chase 'dividend yield' as free money. The fix: read the ex-date price drop and the tax together, and ask whether the business should have kept the cash to grow.
A dividend is cash the company takes out of itself and gives to you. On the ex-dividend date the share price drops by about that amount, because the company is now worth that much cash less. So the reader counts the dividend and the price fall together, and remembers the dividend is taxed in their own hands.
A worked example
A share at ₹200 pays a ₹5 dividend. On the ex-date it opens near ₹195. You now hold ₹195 of share plus ₹5 of cash, still about ₹200, and the ₹5 is taxable. Nothing was created. [illustrative]
How to spot it
- ·price falls near the dividend on the ex-date
- ·dividend counted as income but the price drop ignored
- ·tax on the dividend not subtracted
- ·a very high yield used as the reason to buy
Miller and Modigliani · Dividend policy irrelevance