Dividend policy — why some companies pay you, and others never do
The answer
A dividend is a company handing back profit it has decided it cannot use well enough. Paying one is not generosity and keeping the money is not greed. The only question that matters is whether the company earns more on that rupee than you would.
Why this costs you money
Two mistakes, opposite in direction, made by the same reasoning.
The first is buying a high dividend yield. A stock yields 9%. That looks like a fixed deposit that also grows. Over the next 2 years the dividend is cut twice and the share price falls 40%. You collected 9% and lost 40%. The yield was high because the price had already fallen, and the price had fallen because the market had already concluded the dividend was not sustainable. A high yield is not an offer. It is a warning that somebody with more information than you is selling.
The second is more expensive and nobody notices it. You hold a company that has paid you nothing for 8 years. It keeps 100% of its profit and reinvests it. You assume this is fine, because reinvestment means growth. It was not fine. The company kept ₹40,000 crore of your profits and earned about 6% on them. Nothing appeared in the accounts as a loss. The loss was the difference between what the company did with your money and what you could have done with it.
In India there is a third cost, which is tax. Dividends are taxed at your slab rate. In the highest bracket, roughly a third of every dividend goes to tax the moment it is paid, whether you needed the income or not.
How it works
A company that earns profit has exactly 5 things it can do with it: reinvest it in the business, buy another company, repay debt, pay a dividend, or buy back its own shares. That list is the whole of capital allocation, and the order a company chooses is the clearest statement it ever makes about its own opportunities.
The payout ratio measures the split.
Payout ratio = dividend per share ÷ earnings per share
A payout ratio of 25% means the company kept 3 rupees of every 4 it earned. Above 100% means it paid out more than it earned, which it can only do by using old cash or borrowing, and cannot do for long.
Why growing companies pay nothing and mature ones pay a lot
A company that can earn 25% on every rupee it reinvests should keep every rupee it can. Handing you money it could compound at 25% is a bad trade for you, even though it feels like a reward. This is why the fastest-growing companies pay nothing for years.
A company in a settled industry, with no way to profitably double its capacity, has the opposite problem. Cash accumulates. The return on idle cash drags down the return on everything, and management under pressure to use it will eventually buy something it should not. Paying the money out is the correct decision. It is also an admission, and the admission is the honest part: we cannot use this as well as you can.
The signal in the stability
Boards treat a dividend as close to a promise. Cutting one is read as a confession, and the share price usually falls hard on the day. Because a cut is so painful, boards only commit to a level they believe they can sustain through a bad year. The dividend therefore carries information that the earnings figure does not. Earnings can be managed with accounting choices. A dividend requires cash to actually be paid out.
Buybacks: the other way to hand money back
Instead of paying you cash, a company can buy its own shares in the market and cancel them. The share count falls, so each remaining share owns a larger slice. You receive nothing and own more.
A buyback creates value only when the shares are bought below what they are worth. Buying back expensive shares converts cash into nothing while flattering earnings per share as it does so. Ask 1 question about every buyback: was the company buying because the stock was cheap, or because it had spare cash? Most do the second while describing the first.
What it tells you, and what it does not
A dividend policy tells you how the company sees its own opportunities. A company that pays out 80% of profit is telling you it has run out of things to build. That may be entirely correct.
It does not tell you the company is safe. Dividends are paid out of cash, and cash can be borrowed. Companies have paid dividends for years while the business underneath deteriorated, because cutting would have announced the problem. Nor does it tell you the dividend will continue. There is no legal obligation. The board decides each time.
And a dividend is not income in the way a salary is income. When a company pays you ₹10 per share, the share price falls by roughly ₹10 on the ex-dividend date. Money moved from the company's account to yours, and your share is worth less by the amount that moved. In India that transfer also triggers a tax bill.
The decision rule
Judge the dividend against what the company earns on the money it keeps, never against the yield.
If the company earns a high return on capital and pays little, then retention is working for you and a low yield is good news.
If the company earns a low return on capital and pays little, then you are funding value destruction. This is the worst combination on the list.
If the company earns a low return on capital and pays out most of its profit, then it is behaving correctly for what it is, and can be a perfectly good holding.
Unless the payout ratio is above 100%, or the dividend is funded by borrowing or by selling assets. Then it is not a distribution of profit. It is a liquidation, paid to you in instalments.
Try this now
Five minutes, 1 company you own, 1 calculator. This measures what the company did with the money it kept from you.
- Open a stock screening website or your broker's research page for a company you hold. Find its earnings per share (EPS) for the most recent full financial year and for the year 5 years earlier. Write both down.
- Find dividend per share (DPS) for each of those 5 years and add them up. That is the total you were paid per share over the period.
- Multiply the average of the 5 years' EPS by 5, then subtract the total dividends. What remains is roughly the profit per share the company kept.
(Average EPS × 5) − total dividends = retained earnings per share. - Measure what that retention produced.
(New EPS − Old EPS) ÷ retained earnings per share = the return the company earned on the money it kept.Express it as a percentage.
What you should see. A number that tells you whether keeping your money was the right call.
Above about 15% — the company turned every rupee it withheld into meaningful extra earnings. A low dividend here is good news, and you should want it to keep more.
Between about 8% and 15% — roughly what the money costs. Retention was neither a gift nor a theft.
Below about 8%, or negative — the company kept your profits and produced little with them. Every rupee it did not pay you was a rupee you could have deployed better. This is the finding that changes a holding decision, and it takes 5 minutes to reach.
Two cautions. Use 5 years or more, because 1 bad year distorts everything. And if the share count changed a lot, per-share figures will mislead you — check the share count first, using the method in the second article of this cluster.
Three real cases
1. Apple, 19 March 2012 (United States) — the opportunities ran out faster than the cash Apple announced its first dividend since 1995, alongside a share repurchase programme. The first payment reached shareholders on 16 August 2012. For 17 years the company had paid nothing, through the iPod, the iPhone and the iPad. That was the correct decision every one of those years, because Apple could use the money better than its shareholders could. The dividend was not a sign that Apple had become a better company. It was a signal that the scale of its opportunities had stopped keeping pace with the scale of its profits.
2. Vedanta, 2022 to 2025 (India) — a high yield that belonged to somebody else The mining and metals group paid ₹45 per share in the 2022 financial year and ₹101.50 in 2023, producing one of the highest dividend yields on the Indian market. Then the payout fell to ₹29.50 in 2024. The dividends were widely understood to be driven partly by the cash needs of its overseas parent company, which carried significant debt of its own. An investor buying for the yield was funding a decision taken for reasons that had nothing to do with them, and the yield that attracted them was not repeatable. A payout is not a promise, and it is not always made in your interest.
3. General Electric, 2017 and 2018 (United States) — what a cut actually means For decades GE was among the most widely held dividend stocks in America, owned by retirees specifically for its payout. On 13 November 2017 it halved the quarterly dividend. On 30 October 2018 it cut again, to 1 cent per share. The share price fell heavily on both occasions. The dividend had been maintained for years while the underlying businesses weakened, partly because cutting it would have announced the problem. When the cut came, it did not create the problem. It disclosed it. A long dividend record is evidence about the past, not a guarantee about the future.
The question that resolves it
A novice looks at a stock and asks: what is the dividend yield?
An expert asks: what has this company earned on the profits it did not pay out?
The yield describes a fraction of a price. The second question describes a decade of decisions. A company with a 1% yield that compounds retained profits at 22% is doing more for you than one with an 8% yield that compounds them at 4% — and the second looks better on every screening tool ever built.
What would make this wrong
If paying a dividend were itself a mark of quality, dividend payers would reliably beat non-payers. They do not, and neither does the reverse. That is the point: the policy is not the signal. What the company does with the money it keeps is.
The honest limits are 3.
First, the retained-earnings calculation here is rough. It assumes the change in earnings per share came from reinvested profits, when it may have come from a cost reduction, a currency move or a single unusual year. Use it as a screen that raises questions, not as a verdict.
Second, some investors genuinely need income. A retiree living on dividends is not making an error by preferring a paying company, even if a non-paying one would compound faster. Selling shares to create income is theoretically equivalent and practically harder, especially in a falling market.
Third, a dividend may be a discipline mechanism rather than a return mechanism. Some managements should be given less money on principle, and the dividend is how shareholders take it away from them.
In India
How it reaches you. The board declares a dividend and sets a record date. The money is credited directly to your bank account. The stock trades ex-dividend from 1 business day before the record date, so buyers from that day do not receive it. Companies pay an interim dividend during the year and a final dividend approved by shareholders at the annual general meeting.
Tax. Since April 2020, dividends are taxed in the shareholder's hands at your income tax slab rate. The company no longer pays a separate dividend tax. In the highest bracket the effective rate can reach roughly 35.88%, because the surcharge on dividend income is capped at 15%.
Companies deduct TDS at 10% when dividends paid to you in a financial year exceed ₹10,000, a threshold raised from ₹5,000 with effect from 1 April 2025. TDS is not the final tax; it is credited against your liability when you file. You may deduct interest paid on money borrowed to invest, but only up to 20% of the dividend income.
Policy disclosure. SEBI requires the top 1,000 listed companies by market capitalisation to publish a dividend distribution policy, extended from the top 500 in 2021. It states what the board considers, and sometimes a target payout range. ITC adopted a policy in March 2020 of paying 80% to 85% of profit after tax.
Buybacks, and a change that matters. From 1 October 2024, money you receive in a buyback is treated as a deemed dividend and taxed at your slab rate under income from other sources. Your original cost of those shares becomes a capital loss, which you can set against other capital gains and carry forward for 8 assessment years. That removed most of the tax advantage buybacks had over dividends for Indian residents. Companies still run them — Infosys completed an ₹18,000 crore tender-offer buyback in November 2025 — but the reason is now capital allocation rather than tax.
The route also changed. SEBI phased out open-market buybacks through the exchange from 1 April 2025, leaving only the tender offer, in which the company invites you to sell a set proportion of your holding at a stated price. SEBI then approved the reintroduction of open-market buybacks on 19 June 2026, under a framework operative from 1 August 2026.
In the United States
How it reaches you. Most US companies pay quarterly. The board declares a dividend and sets a record date. Many brokers offer a dividend reinvestment plan (DRIP) that automatically buys more shares with each payment.
Tax. This is the largest practical difference between the 2 countries. A qualified dividend is taxed at the preferential long-term capital gains rates of 0%, 15% or 20%, depending on your total income, rather than at ordinary income rates. High earners pay an additional 3.8% net investment income tax.
To be qualified, you must have held the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. A short-term trader collecting a dividend does not get the preferential rate.
Culture. The Dividend Aristocrats are S&P 500 companies that have raised their dividend every year for at least 25 consecutive years. The Dividend Kings have done it for at least 50. Coca-Cola has raised its dividend every year since 1963, a run standing at 64 consecutive increases as of 2026. Membership creates real pressure: a company approaching 25 years will strain to avoid breaking the streak, which is both a discipline and a distortion.
Buybacks. Buybacks are larger than dividends in aggregate in the United States and are usually conducted in the open market over months. Since 2023, a 1% excise tax applies to the value of net share repurchases by publicly traded US corporations, under section 4501 of the Internal Revenue Code.
Two recent initiations show the same pattern as Apple in 2012. Meta announced its first dividend on 1 February 2024, with a $50 billion repurchase programme. Alphabet announced its first on 25 April 2024, with a $70 billion programme. At the other extreme, Berkshire Hathaway has paid no dividend since 1967, on the stated argument that it can compound the money better than its shareholders can.
Where they differ, and what that tells you
The divergence is tax, and it is large enough to change what you should hold.
In the United States, a qualified dividend and a long-term capital gain are taxed at the same preferential rates. Whether a company returns money as a dividend or as a buyback makes little difference to your tax bill. Dividends are close to tax-neutral.
In India, a dividend is taxed at your slab rate, which can be roughly 35.88% at the top. A long-term capital gain on listed shares is taxed at 12.5%, with the first ₹1.25 lakh of gains in a year exempt. Since October 2024, buyback proceeds are taxed like dividends, so that route no longer offers an escape either.
What that tells you is a calculation you should do before buying anything for its yield.
An Indian investor in the highest bracket looking at a 6% dividend yield is actually looking at about 3.8% after tax. The same investor holding a company that retains its profits, then selling after a year, pays 12.5% on the gain. The gap is close to 3 times. Three consequences follow.
- The headline yield overstates what you get, and it overstates it more the higher your income. Convert every yield to an after-tax yield at your own slab before comparing it to anything.
- Retention is worth more to an Indian investor than to an American one, for identical companies. A company that compounds profits internally defers your tax bill and converts a slab-rate liability into a 12.5% one. That argument does not exist in the United States.
- Advice written for American readers does not translate. Much of the dividend investing literature reaching Indian readers was written where dividends and capital gains are taxed identically. Copied without the translation, it points Indian investors towards the more heavily taxed of 2 options, every time.
This does not mean Indian investors should avoid dividend payers. It means the yield is not the number to compare. The after-tax yield is.
Carry this
- A dividend is an admission that the company cannot use the money better than you can. Sometimes that admission is correct.
- Judge the policy by the return on what is kept, never by the yield.
- In India, convert every yield to an after-tax yield at your own slab before comparing it to anything.