Dividend yield are often less compared to growth we desire. But why investors still prefer dividend paying stocks? Not all investors invest their money for fast growth. In stock market, growth is never a assured thing. For investors who are investing money for income generation likes dividend paying stocks (what are stocks all about?). In Indian stock market there are some consistent dividend paying stocks. Dividend stocks offer two clear benefits for investors. One, they generate short term income in form of dividend. Second, they can also provide capital appreciation when held for long term. Due to high inflation rate prevailing in India, other income generating investors give poor returns. Dividend stocks have clear advantage over other income generating options. The fact that dividend stocks can also provide long term capital appreciation makes them investors favorite. In general a decent dividend paying stocks can yield dividend between 2%-4% per annum.
Advantage of Dividend Paying Stocks
Why it is important to buy best dividend paying stocks? Expert of stocks loves dividend paying stocks. Dividend stocks cannot give long tern returns like growth stocks. But what dividend paying stocks provided is price stability and regular income. Even in worst of times (like year 2008) dividend paying stocks showed resilience compared to tumbling SENSEX. What does this mean for investors? Companies that can afford to pay consistent dividends are stable stocks. What makes dividend paying stocks so stable? If equity can generate regular income, there cannot be a better investment option. This is what majority investor’s love about dividend paying stocks. Once investors get hold of high 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. Dividend paying stocks minimize our exposure to market volatility. Dividend is like short term income. Due to this predictable cash-in, investors are less tempted to sell their holdings. When investors are more like to hold a stock, its price becomes very stable.
Expert investors always strive to build solid investment portfolio. Inclusion of best dividend paying stocks in investment portfolio makes it 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 list of best dividend paying stocks in India. Though dividend yield is generally low, but long term capital appreciation of such stocks beats the average returns.
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 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 paying stocks are good. But yield is not a sufficient indicator to identify a good dividend paying stock. Fundamentally strong stocks which pays consistent dividend are good. A fundamentally strong stock is one which has shown consistent earnings growth. Fundamentally strong stock is one which has rapidly growing reserves (retained earnings).
If you will ask me there cannot be a better option than a dividend paying stock. But why everyone is not buying 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 falls between 0.5% & 2%. So a stock which is yielding higher dividend must be bought with caution. How to identify good dividend stocks?
Both, fluctuating dividend and weak fundamentals are main hurdles in identifying good dividend stocks. I have seen a stock (Strides Arcolab) which currently shows yield of 33% per annum. The doubt that such stocks raise is that is 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 unpredictability was too high. In order to keep investors interested in its stocks they do not had other option than to resort to high dividend payout. There is less doubt that such high dividend yields will be sustained in future 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. Lets see some advantages of dividend stocks. I am sure it will motivate some to buy dividend stocks.
Dividend income is like an interest income for investors
Even during recession, dividend paying companies share profits. When companies are doing well, dividends will surely be paid. Dividend is a tool in hands of companies that they use to lure shareholders to hold on to their stock. Investors shall consider dividends like short term interest income. The interest will keep dripping-in as long as we one holds on to the stocks.
Bad market offer better dividend stocks
Generally consistent dividend paying stocks are never available at undervalued rates. But when market itself is bad, the price of these 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 dividends are mostly stable, blue chip companies. These dividend paying stocks are always in demand. As a cast they always seem t beat the market average returns.
Reinvesting Dividends is Key
Reinvesting dividend will further increase the yield. There are people who use SIP trading-tool to buy consistent dividend paying stocks each month. This way not only they accumulate fundamentally strong stocks but also increase dividend earning. The dividend that flows-in is reinvested back. This extra money is used to buy more of dividend stocks. This cycle continues. 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 per month. Let us start accumulating quality dividend paying Indian stocks.
Best Dividend Paying Stocks in India
|Stocks||Market Price||Market cap (Rs. Cr.)||Average Dividend Yield (Last 3 year)|
|G S F C||72.35||2,882.99||8.52|
|J B Chem & Pharm||210.15||1,781.44||6.98|
|Bank of Maha||43.45||3,645.87||4.22|
|C P C L||95.15||1,416.89||4.90|
|BGR Energy Sys.||177.95||1,284.12||4.50|