Dividend yield is often very low compared to the growth we desire. Then why investors still follow the best dividend paying stocks? Not all investors invest their money for fast growth. In stock market, growth cannot be assured. For investors who are investing money for income generation like dividend paying stocks. In Indian stock market there are companies that pays dividends consistently. Stock of such companies should be our investment target. Dividend stocks offer 2 clear benefits investors. One, they generate short term income in form of dividend. Second, they also provide capital appreciation when held for long term. Historically dividend paying stocks are most stable stocks in the market. Due to high inflation rate prevailing in India, other income generating options gives poor returns. As dividend in tax free, it clearly enjoys advantage over other income generating options. The fact that dividend stocks can also provide long term capital appreciation makes them special. In general, a decent dividend paying stocks will yield dividend between 2%-4% per annum. Important for investors to track such stocks and hold them for long term. In short term dividend will keep dripping-in. In long term capital appreciation will also prove beneficial.
Advantage of Dividend Paying Stocks…
Why it is important to buy best dividend paying stocks? Expert loves dividend paying stocks. Dividend stocks cannot give long tern returns like growth stocks. But what dividend paying stocks provided is price stability and short term income. Even in worst of times (like year 2001, 2008) dividend paying stocks showed resilience. When Indian SENSEX was tumbling down, these stocks were stabler. What does this mean for investors? Companies that can afford to pay consistent dividends has stable stock price. What makes dividend paying stocks so stable? If equity can generate regular income, there cannot be a better investment option. Equity is more famous for long term capital appreciation. But it lacks on short term returns. But as dividend stocks also generates short term income, they are so special. This is what majority investor’s love about dividend paying stocks. Once investors get hold of best dividend yielding stocks, they never sell them. This gives dividend paying stocks its price stability. There are more buyers of dividend paying stocks than sellers. Hence dividend stocks reduces market volatility. When investors are more likely to hold on to a stock, its price becomes very stable.
Experts always strive to build solid investment portfolio. Inclusion of best dividend paying stocks makes investment portfolio very solid. Value investors considers high dividend yield as a value indicator. If a quality stock is yielding high dividend, it is considered as undervalued. In this article we will find a list of best dividend paying stocks in India. Dividend yield of stocks at point of purchase can be low. But long term capital appreciation plus dividend return will certainly beat the inflation.
Dividend Paying Stocks Represent Strong Underlying Business
Dividend disbursement is profit sharing with shareholders. A company which can share its profits consistently for long term must be confident. This confidence comes with predictability of future earnings. A company will never compromise its short term liquidity needs to please shareholders. Maintaining sufficient liquidity to pay current liabilities is a must 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. One 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.
What are Good Dividend Paying Stocks?
Some might think that high dividend yielding stocks are good. But yield is not a sufficient indicator to identify a good dividend paying stock. To find a good dividend stock, we shall check its fundamentals first. We must perform fundamental analysis of companies. Paying high dividend one year and nothing following year is also not good. Consistent dividend payment is what makes a stock good. If dividend paying stock are so good, why everyone do not buy one? Looking at dividend yield is not sufficient. It may happen that a stock is yielding 8% dividend presently, but the following year the yield will be as low as 0.5%. Yes its true, for majority companies, dividend yield is not more than 1%. A stock which is yielding higher dividend must be bought with caution.
Fluctuating dividend and weak fundamentals are main hurdles in identifying good dividend stocks. I have seen a stock (Strides Arcolab) which was ones yielding dividend of 33% per annum. The doubt that such stocks raise is that are such high yields sustainable? When looked into profit and loss account of Strides Arcolab we found the answer. Profit of company has been most wavering. Its reported net profit for last five years was (in Rs. Crore) 55.99, 117.92, 73.56, 105.51 & 6.14. Though in last five years the profit rose from Rs 6 crore to Rs 56 crore but volatility in earning was too high. Probably to keep investors interested in its stocks high dividend payout was maintained by company. There is no doubt that such high dividend yields cannot be sustained in coming years. The best option to identify good dividend paying stocks is to dig deep into financial reports. Proportionately increasing EPS and dividend per share is a good indicator. Too high dividend payout is not sustainable.
The purpose of writing this article is to publicize the concept of dividend focused investing. Not many people are motivated to buy stocks for dividends. Dripping dividends are less exciting compared to more visual capital appreciation. Capital appreciation cannot be as certain as dividend income. People favor capital appreciation because it gives probability of higher earnings. But dividends are more reliable. I this article will motivate readers to consider dividend focused investing.
Dividend income is like risk free income…
Even during recession, dividend paying companies share its profit. When companies are doing well, dividend distribution will happen. Dividend is like a tool in hands of companies that they use to lure shareholders. In turn shareholders offers their loyalty by holding on to their stocks. Why investors like dividend? Investors considers dividends like risk free income. Good dividend paying companies generally pay dividend each year. So dividend income drips in each year like interest income.
Weak Market offer better dividend stocks…
Generally, quality & consistent dividend paying stocks are never available at undervalued rates. But when market itself is weak, the price of stocks becomes attractive. If one bought say 10 Nos dividend stocks at $20. Suppose these stocks pay $1 as dividend income. It means the dividend yield is 5%. Suppose due to Eurozone crisis the price of this share falls to $15. In this case more stocks shall be purchased. Why? Because this price dips has increased dividend yield to 6.67% ($1/$15). The companies which pay consistently high dividends are mostly stable, blue chip companies. These dividend paying stocks are always in demand.
Reinvesting 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.
Best Dividend Paying Stocks in India
|SL||Company||Market Price (Rs.)||Market cap (Rs.Cr.)||Current Year Dividend Yield (%)|
|2||State Bank of India||306.00||23,714.89||9.80%|
|14||I O B||62.05||7,665.33||1.93%|
|17||Bank of Maharashtra||43.80||4,656.74||2.28%|
Dividend Distribution History of last 5 Years
(DIV.in 2014 = Dividend/Share paid by company in FY 2013-2014)
|SL||Company||DIV. in 2014||DIV. in 2013||DIV. in 2012||DIV. in 2011||DIV. in 2010||Avg. Dividend Yield (5 years) %||Dividend Growth in last 5Years|
|2||State Bank of India||30||41.5||35||30||30||10.88%||0.00%|
|14||I O B||1.2||2||4.5||5||3.5||5.22%||-19.27%|
|17||Bank of Maharashtra||1||2.3||2.2||2||2||4.34%||-12.94%|