(1) INVESTING FOR DIVIDEND : 4 REASONS WHY YOU INVEST IN DIVIDENT PAYING SHARES.
(I). It’s Different: Dividend focused investing is different. Investors who invest in them do it with a different objective. Their focus is on a regular income. Even if the yield is low, it’s ok for them. Read more about income investing.
(II). Visible: Things which are visible, are more predictable. Predictability gives a more sense of control. Likewise, compared to capital appreciation as dividends are more predictable, investors feel more in control.
(III). Foolproof: If the rules are applied properly, it will not be wrong to say that dividend-focused investing is almost foolproof. There are fewer chances that the investor will make a loss with them. Read more about foolproof investing rules.
(IV). Pros Like it: Champion investors like Warren Buffett love dividend-paying stocks. A high growth rate is a priority for the majority. But expert investors prefer a balanced portfolio. Read about Warren Buffett’s 3 rules.
(2) HOW TO GENERATE DIVIDEND INCOME?
Buy dividend-paying stocks, and hold them for the long term. What is the point about the ‘long term’? A stock that is yielding 0.5% at the time of purchase, can yield much higher with the passage of time. How ?
Let’s understand this with a real-life example. EXAMPLE: TCS
Suppose a person bought shares of TCS in the year Mar’09. Details are as below:
•March’2009Share Price (2009): Rs.132,/share.No of shares bought: 10 nos.
The cost paid to buy TCS: Rs.1,320.
The dividend paid in 2009: is.14/share.Total dividend income in 2009: Rs.140.The
the dividend yield in 2009: 10.6%
Suppose this person held on to his shares till the year 2018. What will be his dividend yield in 2018? [Note: Bonus shares 1:1 was also issued to all shareholders between Mar 2009 & Mar 2018]
•March 2018: Cost paid to buy TCS: Rs.1, No. of shares held in 2018: 20 nos (1:1 bonus share)Dividend paid in 2018: Rs.50/share.Total dividend income in 2018: Rs.1,000 Dividend yield in 2018: 75%.
Read more about dividend analysis of TCS stocks here…
Please note how dividend yield improved from the year 2009 to 201B. The dividend yield in 2009 was 10.6% compared to 75.7% in 2018.
What is the point?
Just by holding on to “Good Stocks” for the long term (say 10 years), their dividend yield itself will become high enough to beat the returns of any debt instrument.
Is it that easy? Buy dividend-paying stocks, hold for the long term, and that’s it? Yes, it is this easy. The only control point is, one must buy only “Good Stocks”.
3. GOOD DIVIDEND STOCKS…
Not all stocks that pay dividends are good. There are two criteria which makes a good dividend stock:
• Consistent dividend payout.
• Consistent growth in the dividend paid.
This is why companies like TCS and HUL are good dividend-paying stock They not only pay dividends regularly, but it also grows with time.
(4) HOW TO IDENTIFY THEM?
What are the dividends? Dividends are nothing but a part of the company’s net profit. A company that makes more profits will pay higher dividends.
The dividend payment is a process by which companies share their net profit with its shareholders. Good companies tend to increase their profits over time. As the profits grow, dividend payment by the company also increases.
This is a hint which can be used to identify potential dividend stocks. Do the following:
• Step #1: Open the profit and loss account of the company.
• Step #2: Check if the EPS has grown in the last 3 years.
• Step #3: Also check if dividend per share has grown in the last 5 years.
• Step #4: Compare if EPS growth and dividend per share growth are similar.
If EPS and ’dividend per share’ growth are similar, it is a good sign. Why? Because of the following reasons:
• EPS growth means the company’s net profit is improving.
• Dividend per share growth means, the company believes in dividend philosophy.
• EPS growth similar to dividend growth means, as company profit will increase in the future, its dividend payout will also improve.
(5) DIVIDEND STOCKS VS FIXED DEPOSITS
Why I am comparing dividend stocks with fixed deposits? Because the starting yield of dividend stocks is even lower than fixed deposits. So some might think that why to invest in dividend stocks?
Good dividend stocks offer two clear benefits to its investors:
•Short term income: Though starting yield of dividend stocks can below, but it improves with time. Moreover, good stocks can yield a very stable dividend income in the short term.
•Long Term Gain: There are two types of gains in the long term. First, dividend per share will improve hence its dividend yield will also go up. See TCS example shown above. Moreover, there will also price appreciation of these stocks with time.
Though fixed deposits can give fixed interest it will never grow with time.
The initial yield of a fixed deposit can be better than the dividend yield of stocks, but there are some disadvantages as well. Income from the fixed deposit is fully taxable. But dividend earned from stocks is tax-free (till Rs.10 Lakhs per year).
Example: If you earned a dividend income of say Rs.10,5D,000 in a year, you will be taxed only on Rs.50,000 @ 10%.
(6) THERE ARE “HOLD FOREVER” STOCKS
The price of dividend-paying stocks is very stable. Historically, the price of dividend-paying stocks wavers less than other stocks. They have lower beta. Do you know why?
Because people tend to continue to “hold on” to their dividend stocks for a longer period of time (sometimes like forever). Why? Because they continue to earn dividends no matter what. There is no need for them to sell their dividend stock holdings.
These stocks tend to yield dividends even during the stock market collapse.
(7) HOW TO PLAN DIVIDEND STOCKS PURCHASE?
How to plan its purchase? By keeping a past record of companies which has paid decent dividends. This will be your list of top dividend-paying stocks. (a ready-made list is provided in the end).
Which records are more important than others?
•Net Profit (PAT}: This is the profit earned by the company after paying all its dues like adjusting for depreciation, interest, taxes, etc. Read more about the analysis of the profit margin of companies.
•Dividend paid (D): Here we will have to compare two things. Out of the total PAT, how much lump-sum dividend the company has paid. Read more about dividend yield formula.
•Dividend Payout % (D/PAT): Dividend payout suggests, what portion of PAT was paid out as dividends to the shareholders. Record keeping of ”dividend payout % will give good insight. Good companies try to mimic their past dividend payout ratio.
The above chart is showing a trend of dividend payout ratio for TCS and HUL. What is the trend?
HUL: If HUL will follow this trend, most likely it will give 80% of its PAT as dividend to its shareholders in times to come.
So if we can extrapolate PAT of HUL for the next 3-5 years, we will approximately know what can be a potential “dividend income” out of HUL
TCS: If TCS will follow this trend, most likely it will give 35% of its PAT as a dividend to its shareholders in the next years.
(8) HOW ELSE TO EARN DIVIDENDS?
In India, there are only a few avenues to earn dividends: stocks and dividend-paying mutual funds.
In Europe and America, dividend-paying exchange-traded funds (ETF’s) are also available. At the moment India does not have such ETFs.
People can buy stocks using an online trading account. These days mutual funds can also be purchased using online trading platforms.
[Read more about REITs. They can also be a good source of dividend income]
(9) LIMITATIONS OF DIVIDEND…
If dividend-paying stocks are so good, why everyone does not only buy them? Enough of only good things about dividend-paying stocks. Here are some limitations of dividend-focused investing. I feel, being aware of these limitations will further enhance the benefits of dividend-focused investing for the investors…
•High Dividend Yield is not reliable: Dividend yield is not a sufficient indicator to identify good dividend-paying stocks. Stocks paying high dividends one year, and nothing the following year, is also not good. It may happen that a stock that is yielding an 8% dividend today, may yield only 0.5% in the next FY.
•The dividend is high but fundamentals are weak: A few years back Strides Pharma Wds yielding dividends close to 33% per annum. On Mar’14 it paid a dividend of Rs.505 per share. In Mar 2018 it paid a dividend of the only Rs.2 per share. Why did it happen? Because EPS of this stock fell from Rs.593 (Mar 2014) to Rs.99 (Mar 2018).
People who bought this stock then, for dividend yield, must be feeling disappointed today.
Moral of the story: It is important to look at dividend yield but in conjunction with other fundamentals like sales, profit, EMS, dividend payout %, etc.
LIST OF TOP DIVIDEND PAYING STOCKS IN INDIA 2020
•PAT: Profit After Tax — Net Profit
•The dividend (5YA): Average Lump Sum Dividend Paid in the Last 5 Yrs (Rs. Crore).
•D.Yield (5A): Dividend Yield (Average Last 5 Years).
•D.Yield (CY}: Dividend Yield (w.r.t. current price).
