What Is Dividend and How It Is Distributed in Case of Stocks and Mutual Funds?

If you purchase a stock, you are becoming a minute stake holder in the company. That means you have a right to get the profits earned by the company. The profit is distributed to you by the way of dividends. The rate of dividend is declared by the company and the amount that you get is directly proportional to the amount of money you invest in the company. Dividends are usually declared as and when the company declares results and makes a profit.

In case of mutual funds, dividends are given as and when the fund house makes a profit. But in this case you have to opt for the dividend option. Or else you will get capital appreciation by virtue of the increase in price of the units given to you.

The first option is dividend payout in a direct method. In this case the dividend gets directly credited to your bank account. This method is useful only if you need a regular flow of cash. But in this case the price of the units are not supposed to grow too much.

The next method is dividend re investment. In this method the amount of dividend is used to purchase new units for you. This is similar completely to the Growth plan and helps in future capital appreciation.

Some fund houses design funds keeping in mind this factor. Money is invested into stocks that yield high dividends. Thus the time and frequency of dividend payout matches the time and frequency of the dividends paid by the companies. Dividends are a major attraction in equity investments and thus help in creation of wealth in a long run.

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