There are less takes of dividend paying stocks. Do you know why?
Because more people like “high capital appreciation”.
Alternative to capital appreciation is “regular income”, like dividend.
But as the yield of dividend income is low, there are less takers of it.
But does that make “dividend” less worthy? No at all.
So what I am trying to say? Dividend has low yield, still it can be preferred?
Yes, you understood me right.
Some even find it surprising that, there are investors who invest in stocks just for dividends.
Just to exemplify the magnitude of the difference, lets see a data:
- Stock can give a price appreciation of 12% p.a.
- Whereas, a 3% dividend yield is considered good.
Ask a kid, which is a bigger number 12% or 3%. You will get a right answer.
So why I am promoting a thing whose numbers are so low?
#1. Dividend focused investing is also necessary…
Yield of dividend income can be low.
But investors who invest in them does it with a different objective.
Yes, people who buy dividend paying stocks are different. Why?
The reason is simple:
Dividend income is more predictable. Capital appreciation is less certain.
Champion investors like Warren Buffett love dividend paying stocks, why?
High growth rate is a priority for majority.
But expert investors prefer to have a balanced portfolio.
Portfolio focusing only on capital appreciation is not good.
Inclusion of dividend paying stocks has a balancing effect on ones investment portfolio.
#2. Passive Income – Dividends
Expert investors love passive income.
Dividend is one of the best form of passive income.
Dividend paying stocks are the best source of dividend-generation.
Passive income in form of dividend is like an assured income.
For passive income lovers, it is essential to keep a track of the highest dividend paying stocks.
If it is so, it means any company which pay high dividends becomes a good buy?
#3. All dividend paying stocks are not good
Not all stocks that pays dividends are good.
If the criteria is assured income, all consistent dividend paying stocks must be a good buy, right?
Dividend focused investors like to have one more check.
Consistent dividend payout by companies are great, but it must also show growth.
Dividend, which grows year after year makes it even more likeable.
Is it possible for companies to pay growing-dividends to its shareholders?
Yes, but identification of such companies is not easy.
The investors must take the time out and look into their financial reports.
Dividend payment is a process by which companies share its net profit with its shareholders.
When companies increase their dividend payouts, it is actually giving a hint that its profits are improving.
Growing dividend payout, year after year, is an indication of a fundamentally strong company.
So what can we conclude here?
Good dividend paying stocks must have the following attributes:
- Consistent dividend payout.
- High dividend yield.
- Growth in “dividend per share” with time.
Not all companies can dare to pay dividends
Dividend paying companies are more confident about its future cash flows.
Hence they dare to distribute large amount of PAT as dividends.
#4. Benefits of Dividend focused investing
Good dividend stocks offer 2 clear benefits to its 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.
Which other investments can generate short term income?
Debt linked, risk free options are available.
These investment options can give a yield of 7.5% per annum.
Where are stocks can give only 3-4% in the beginning years.
Why to invest in stocks?
Initial yield of debt linked plans can be better than dividend yield of stocks.
But there are some disadvantages of debt plans compared to dividend paying stocks:
- Income from debt linked plans are 100% taxable.
- Yield of debt linked plans cannot improve with time.
Dividend received from stock holdings in India is almost tax free.
Why I say almost?
Because, if dividend income exceeds Rs.10,00,000/year, only then it is taxable.
Example: If you earned a dividend income of say Rs.10,50,000.
You will be taxed only on Rs.50,000 @ flat 10%.
Another benefit of dividend paying stocks is its “potential growth”.
Lets do more drilling on the benefits of investing in dividend paying stocks:
#4.1 Price of 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.
This gives dividend paying stocks its price stability.
#1.2. Dividends are like fixed income
If equity can generate regular income, there cannot be a better investment.
Equity is more famous for its long term capital appreciation. But they are risky.
To reduce the risk level, people are asked to hold on to equity for long term. Hence, long term capital appreciation yields nil short term income.
Moreover, as price of equity is volatile in short term, only those investors invest in equity who have high risk profile.
But dividend paying stocks comes for the rescue of the defensive investors. Dividend stocks are like hybrid of equity and debt based investment options.
Hence, even defensive investors love including dividend stocks in their portfolio.
This is one reason why, once investors get hold of a good dividend paying stock, they never sell it.
#1.3. Investors can plan and earn high dividends
It is possible to plan purchases of good dividend paying stocks. How to plan?
Keeping a record of past dividend payouts by companies helps in planning.
Investors can tract the dividend payout. Compared to the net profit generated by the company, what portion of PAT is paid out by company to its shareholders can be comprehended.
Though it will be only a guess work, but generally companies duplicate their past behaviours.
A company which has a habit of paying 30% of their net profit in dividends will continue to do the same in times to come.
So this is first part of the planning process. Keep a note of how much percentage of net profits companies pay in form of dividends.
The second part of planning is to keep a track of market price of its stock. Suppose at a market price of Rs.100, a stock is yielding dividend of 2%. If the price falls to Rs.80, the same stock will show dividend yield of 2.5%.
When price of stocks fall, its dividend yield becomes more attractive.
During stock market crash, price of stocks fall by huge margins. During this time, investors can plan to accumulate good dividend paying stocks.
#1.4. High dividend payout means company is cash rich
Value investors considers high dividend yield as a strong value indicator.
If a quality stock is yielding high dividend, it is considered as undervalued.
We know that, 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.
How much dividend a company pays to its shareholders gives a great hint about how the company is managing its sales, profits, and debt.
Companies which shares its profits consistently (dividends) are confident companies. This confidence comes with predictability of future earnings.
A good company, will never compromise its short term liquidity to please shareholders. Maintaining liquidity to pay its current liabilities is a top priority for any company.
So if a company is paying dividends it means that liquidity is in full control. A company which is paying regular dividends must have sufficient liquidity to take care of its current liability.
How to accumulate dividends?
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 it, 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.
#2. Control Points
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 paying stocks.
Ok, enough of only good things about dividend paying stocks. Here are some control points related to dividend focused investing.
Being aware of these control points is essential to keep dividend based investing profitable.
#2.1. 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.
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 2%.
Investors target is to buy dividend stocks which has consistently paid dividends and their yield is also high.
It is also essential to be critical on future growth prospects of dividend income from ones stock holdings.
#2.2. Beware of Fluctuating dividends and weak fundamentals
Fluctuating dividend and weak fundamentals are main hurdles in identifying good dividend stocks.
Couple of years back Strides Arcolab was yielding dividend close to 33% per annum. But today in 2017, its yield is close to 0.55%.
It means, such high yields are not sustainable.
Lets look into profit and loss account of Strides Arcolab.
In year ending Mar’14, the company reported a net profit of Rs.3512 Crore. Out of this net profit, it issued Rs.3008 crore in dividends. It means, 85.6% (dividend payout %) of profit was paid as dividends. This is unrealistic.
In year ending Mar’15, the company reported a net profit of just Rs.532 Crore. Out of this net profit, it issued Rs.643 crore in dividends. It means, 120.8% (dividend payout %) of profit was paid as dividends. This kind of dividend payout is unsustainable.
As result what happened after Mar’15? Dividend payout fell to normal levels, 26.35 in Mar’16 and 32.9% in Mar’17.
Moreover, you will also note that how wavering the net profits of the company has been in last 5 years.
In last 5 years the profit of company has risen from Rs.55 crore to Rs.3512 crore, and then falling back to Rs.108 crore.
This is a problem as earnings are too volatility. Hence, to keep its investors interested, such companies pay high dividends. It is just like an eyewash.
One must be extremely careful of such performances.
Suggestion – Try to reinvest Dividends
Reinvesting earned dividends will further increase the yield.
People must invest systematically to accumulate dividend stocks. Then the earned dividends from such stocks must be reinvested.
It is important to reinvest the dividends that flows-in. This extra money buys more dividend stocks.
This cycle continues.
More stocks means more dividends. More dividends means, more stocks purchase. It becomes a a great wealth generating cycle.
It is said that Warren Buffett earns billion dollars alone in dividends.
Set a personal target for yourselves. In next five years, le your dividend income reach Rs 5,000/month mark.
Lets start accumulating quality, dividend paying Indian stocks.
Best / High dividend paying stocks in India 2018
(Updated as on April’2018)
- Coal India Limited (CIL)
- Tata Consultancy Services (TCS)
- Hindustan Zinc
- ITC Ltd.
- NTPC Ltd.
Check this link to get details of total 44 nos high dividend paying stocks list in a tabulated form…