Shares and Dividends • Topic 2 of 3

Dividend and Return on Investment

What is a dividend? A dividend is the portion of a company's profit distributed to its shareholders. It is usually expressed as a percentage of the face value of the share.

Dividend formula: Dividend per share = (Dividend percentage × Face Value) / 100

Total dividend = Number of shares × Dividend per share

What is Return on Investment (ROI)? Return on Investment (ROI) measures how much profit you earn relative to the money you invested. For shares:

ROI = (Annual dividend income ÷ Total investment) × 100%

Important distinctions:

Dividend is always calculated on Face Value, not Market Value
Your investment depends on Market Value (what you actually paid)

Real-life analogy: If you buy a house for ₹50 lakhs (your investment) and rent it out for ₹3 lakhs per year (your income), your return is 6%. Similarly, when you buy shares, your dividend is your "rental income," and your ROI tells you how good the investment is!

┌─────────────────────────────────────────────────────────────┐
│              DIVIDEND AND ROI - VISUAL REPRESENTATION        │
└─────────────────────────────────────────────────────────────┘

DIVIDEND CALCULATION:

    Company declares: 12% dividend
    
    Face Value = ₹10
    
    Dividend per share = 12% of ₹10 = ₹1.20
    
    If you own 500 shares:
    Total dividend = 500 × ₹1.20 = ₹600


ROI CALCULATION:

    Your Investment:
    
    Bought 100 shares at MV = ₹50 each
    Total investment = 100 × 50 = ₹5,000
    
    Dividend received:
    FV = ₹10, Dividend rate = 15%
    Dividend per share = 15% of ₹10 = ₹1.50
    Total dividend = 100 × 1.50 = ₹150
    
    ROI = (150 / 5000) × 100% = 3%


COMPARING TWO INVESTMENTS:

┌─────────────────┬───────────────────┬─────────────────────┐
│                 │   Share A         │     Share B         │
├─────────────────┼───────────────────┼─────────────────────┤
│ Face Value      │     ₹10           │       ₹100          │
│ Market Value    │     ₹40           │       ₹120          │
│ Dividend Rate   │     20%           │       12%           │
│ Dividend/ share │     ₹2            │       ₹12           │
│ Investment per  │     ₹40           │       ₹120          │
│ share           │                   │                     │
│ ROI per share   │  2/40=5%          │   12/120=10%        │
└─────────────────┴───────────────────┴─────────────────────┘

Share B gives better return despite lower dividend rate!


FLOWCHART: CALCULATING DIVIDEND INCOME

    Start: Know your shares
           │
           ▼
    Dividend % × Face Value = Dividend per share
           │
           ▼
    Dividend per share × Number of shares = Total Dividend
           │
           ▼
    Total Dividend ÷ Total Investment × 100 = ROI%

Solved Examples

Worked Example

A company declares a 15% dividend on shares of face value ₹20. Find the dividend per share.

Solution

Step 1: Face value = ₹20
Step 2: Dividend rate = 15%
Step 3: Dividend per share = 15% of ₹20 = (15/100) × 20
Step 4: = 0.15 × 20 = ₹3

Answer: ₹3 per share

Worked Example

Rohan owns 300 shares of ₹25 each. The company pays a 12% dividend. Find his annual dividend income.

Solution

Step 1: Dividend per share = 12% of ₹25 = (12/100) × 25 = ₹3
Step 2: Number of shares = 300
Step 3: Total dividend = 300 × 3 = ₹900

Answer: ₹900

Worked Example

Neha bought 200 shares of a company at ₹150 each (market value). The face value is ₹100 and the dividend declared is 18%. Calculate her return on investment (ROI).

Solution

Step 1: Total investment = 200 × 150 = ₹30,000
Step 2: Dividend per share = 18% of ₹100 = ₹18
Step 3: Total dividend = 200 × 18 = ₹3,600
Step 4: ROI = (Total dividend / Total investment) × 100
Step 5: = (3600 / 30000) × 100 = 12%

Answer: 12%

Key Points

Dividend is always calculated on Face Value, not Market Value
Dividend per share = (Dividend rate × Face Value) / 100
Total dividend = Number of shares × Dividend per share
ROI = (Total dividend / Total investment) × 100%
A higher dividend rate doesn't always mean better return — consider market price
Dividends are paid from company profits (not guaranteed every year)

Quick Check — 4 MCQs

Tap an option to check your answer0 / 4

Q1.Dividend is always calculated on the:

Explanation: Dividend $\%$ of face value.

Q2.The dividend per share equals:

Explanation: On the face value.

Q3.The return $\%$ on investment is:

Explanation: Income over money invested.

Q4.A $\textsf{Rs }100$ share paying an $8\%$ dividend gives per share:

Explanation: $8\%$ of $100$.

Practice more MCQs → 📝 Assignment · 35 marks