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Investors desire high return on investment. This is the reason why majority like capital appreciation & not dividend yield. But dividend yield of stocks is often very low compared to desired growth rate. Then why champion-investors love best dividend paying stocks? High growth rate is a priority for majority, but expert investors believe in passive income. Dividend income is one of the best passive income source. People who believes in passive income, loves dividend paying stocks. Passive income investors are like critics of fast growth.
Such investors does not love fast-growth just for the sake making money. Passive income (dividend) is almost like a assured income. Whereas capital appreciation (potential high growth) is not assured. For passive income lovers, it is essential to track and buy the best dividend paying stocks. Not all stocks that pays dividends are best. In this article we will provide list of best dividend paying stocks for passive income lovers. Expert investors does not like dividend paying stocks just for assured income. Potential of dividend income to grow year after year makes it even more likable.
Dividend payment is a process by which companies share net profit with its shareholders. Increase in dividend payout means companies net profit is improving. Companies which are able to grow its profit year after year are good. These companies are more confident about its future cash flows. Hence they dare to distribute large amount of PAT as dividends. My readers should note that, dividend yield at point of purchase may be low. But over a period of time, with improving PAT, dividend yield will improves.
Dividend stocks offer 2 clear benefits to investors. First, they generate short term income. This income is both consistent and also grows. Secondly, they also provide capital appreciation when held for long term. High inflation rate in India, makes other risk-free investments less lucrative. As dividend in tax free, it clearly enjoys advantage over other risk-free options. The fact that dividend stocks can also provide capital appreciation makes them so special.
Dividend Paying Stocks are Stable
Dividend paying stocks are very stable. Historically, price of dividend paying stocks waver less than other stocks. They have lower beta. We may not feel this benefit when market is fair. But when stock market crashes, dividend stocks stands tall. When everywhere there is a panicky, dividend stocks provides stability. People continue to hold on to dividend stocks even during market crash. The reason is simple, they continue to earn dividend even during market crash. Moreover, dividend stocks are those stocks, which recovers faster after crash. So, instead of selling, people buy dividend stocks during market crash.
Dividend is like regular income
If equity can generate regular income, there cannot be a better investment. Equity is more famous for long term capital appreciation & risky. Short term reliability of equity is bare minimum. But dividend stock is a hybrid of equity and debt. For a defensive invest like me, dividend stocks allows us to include equity in portfolio. Once investors get hold of a good dividend stocks, they never sell them. This gives dividend paying stocks its price stability.
Accumulate more of Dividend stocks
There are more buyers of dividend paying stocks than sellers. But there is an exception during market crash. During market crash sellers dominate the market. During crash, market price of stocks falls. But this makes dividend stock holders even more happy. They buy more dividend stocks during every price-fall.
Dividend is a strong value indicator
Value investors considers high dividend yield as a strong value indicator. If a quality stock is yielding high dividend, it is considered as undervalued. Improving sales and profit figures are one of the strongest fundamental indicators of quality stocks. High profitability and low debt dependency is just like an icing on cake. Companies which shares its profits consistently (dividends) are confident companies. This confidence comes with predictability of future earnings. Companies will never compromise its short term liquidity to please shareholders. So if a company is paying dividends it means that liquidity is in full control. Maintaining liquidity to pay its current liabilities is a top priority for any company. A company which is paying regular dividends must have sufficient liquidity to take care of its current liability.
How to accumulate dividend paying stocks?
In India there are only few avenues to accumulate dividend. One of the well-known way is to buy stock that pays dividends. Another way is to buy dividend paying mutual funds. In Europe and America dividend paying exchange traded funds (ETF’s) are also available. At the moment India do not have such ETF’s. People can buy stocks using online trading account. These days mutual funds can also be purchased using online trading platforms. If one does not have one then the easiest option is to call your bank. They will send investment agents who can arrange to buy dividend focused mutual funds for you.
High Dividend Yield is enough….?
Some might think that high dividend yielding stocks are good. But yield is not a sufficient indicator to identify good dividend paying stocks. Stocks paying high dividend one year and nothing the following year is also not good. Consistent dividend payment is what is more interesting. If dividend paying stock are so good, why everyone do not only buy them? This is because not many know how to identify good dividend stocks. People just focus on high dividend yield, but this is insufficient. It may happen that a stock is yielding 8% dividend. But the following year the yield falls to as low as 0.5%. This is what happens for majority companies. For majority stocks dividend yield is not more than 1%. Investors target is to buy dividend stocks which has consistently paid dividends and their yield is also high.
Beware of Fluctuating dividends and weak fundamentals
Fluctuating dividend and weak fundamentals are main hurdles in identifying good dividend stocks. One year back Strides Arcolab was yielding dividend of 33% per annum. Today its yield is close to 55%. But are such high yields sustainable? Look into profit and loss account of Strides Arcolab. Profit of company has been most wavering. Net profit for last 5 years was 55.99, 117.92, 73.56, 105.51 & 6.14 (Rs.Cr.). In last 5 years the profit of company has risen from Rs 6 crore to Rs 56 crore. But problem is high volatility of earning. To keep investors interested, such companies pay high dividends.
Re-investment of Dividends is Key
Reinvesting dividend further increases the yield. People must invest systematically to accumulate dividend stocks. This way not only they accumulate fundamentally strong stocks but also increase dividend earning. It is important to reinvest dividend that flows-in. This extra money buys more dividend stocks. This cycle continues. More stocks means more dividend, which again buys more stocks. It is said that Warren Buffett earns billion dollars alone in dividends. Let us set a personal target for ourselves. In next five years our dividend income shall be reach Rs 5,000/month. Let us start accumulating quality, dividend paying Indian stocks.
Top Dividend Paying Stocks in India in 2015
(Updated as on February'2015)
CY = Current Year, 5Yr = In last 5 Years, 10Yr = In last 10 Years
|SL||Company||Price||Dividend Yield % (CY)||Dividend Per Share Growth Rate (5Yr)||Dividend Per Share Growth Rate (10Yr)|
|11||RURAL ELECTRIFICATION CORP||317||3.00%||9.23%||12.20%|
|15||GREAT EASTERN SHIPP||346||2.60%||2.39%||0.00%|
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