Dividend

Investing in dividend-paying stocks is a great way to build long-term wealth. Below, you’ll find introductory information about dividend stocks.

What is a Dividend?

A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. The annual dividend per share divided by the share price is the dividend yield.

How Do Dividends Work?

Essentially, for every share of a dividend stock that you own, you are paid a portion of the company’s earnings. You get paid simply for owning the stock!

For example, let’s say Company X pays an annualized dividend of 20 cents per share. Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of 20 cents (or 5 cents) for each share you own. This may not seem like a lot, but when you have built your portfolio up to thousands of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years. The key is to reinvest those dividends!

What are Cash Dividends and One-time Dividends?

Cash Dividends

Regular cash dividends are those paid out of a company’s profits to the owners of the business (i.e., the shareholders). A company that has preferred stock issued must make the dividend payment on those shares before a single penny can be paid out to the common stockholders.

Special One-Time Dividends

In addition to regular dividends, there are times a company may pay a special one-time dividend. These are rare and can occur for a variety of reasons such as a major litigation win, the sale of a business or liquidation of a investment. They can take the form of cash, stock or property dividends.

When Do Dividends Get Paid?

Dividends must be declared (i.e., approved) by a company’s Board of Directors each time they are paid. There are four important dates to remember regarding dividends.

Declaration date:

The declaration date is the day the Board of Directors announces their intention to pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.

Date of record:

The date of record is the date on which a company reviews its records to determine exactly who its shareholders are — an investor must be a “holder of record” in order to receive a dividend payout. A stock will almost always begin trading ex-dividend (or “ex-rights”) the second business day before the record date. In other words, only the owners of the shares on or before the ex-dividend date will receive the dividend. If you purchased shares of Coca-Cola on or after the ex-dividend date, you would not receive its upcoming dividend payment; the investor from whom you purchased your shares would.

Ex-dividend Date:

The ex-dividend date of a stock is the single most important date for dividend investors to consider. To receive a stock’s upcoming dividend, an investor must purchase shares of the stock prior to the ex-dividend date.

Payment date:

This is the date the dividend will actually be given to the shareholders of company.

What exactly is a Stock Dividend?

A stock dividend is a proportionate distribution of additional shares of a company’s stock to owners of the common stock. In other words, you will receive additional shares of stock when a company declares a stock dividend, in contrast to a cash dividend. A company may opt for stock dividends for a number of reasons including inadequate cash on hand or a desire to lower the price of the stock on a per-share basis to prompt more trading and increase liquidity. The term “stock split” can also apply to stock dividends.

HOW TO GENERATE DIVIDEND INCOME?

Buy dividend paying stocks, and hold them for long term. What is the point about ‘long term’? A stock which is yielding 0.5% at the time of purchase, can yield much higher with passage of time. How?

Let’s understand this with a real life example.

EXAMPLE: TCS

Suppose a person bought shares of TCS in year Mar’09. Details are as below:

March’2009
- Share Price (2009): Rs.132/share.
- No of shares bought: 10 nos.
- Cost paid to buy TCS: Rs.1,320.
- Dividend paid in 2009: Rs.14/share.
- Total dividend income in 2009: Rs.140.
- Dividend yield in 2009: 6%.

Suppose this person held on to his shares till year 2018. What will be his dividend yield as on Mar’18? [Note: Bonus shares 1:1 was also issued to all shareholders between Mar’09 & Mar’18]

March’2018:
- Cost paid to buy TCS: Rs.1,320.
- 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: 7%.

Read more about dividend analysis of TCS stocks here…

Please note how dividend yield improved from year 2009 to 2018. 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 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 long term, and that’s it?Yes it is this easy. The only control point is, one must

buy only “good stocks“.

GOOD DIVIDEND STOCKS…

Not all stocks that pays dividends are good. There are two criteria which makes a good dividend stock:

Consistent dividend payout.
Consistent growth in dividend paid.

This is why companies like TCS and HUL are a good dividend paying stock. They not only pay dividends regularly, but it also grows with time.

Do all companies pay growing-dividends to its shareholders? No. This is why identification of good dividend paying companies is not easy. How to do it? By digging into the financial reports.

HOW TO IDENTIFY THEM?

What are dividends? Dividends are nothing but a part of companies net profit. A company which make more profits, will pay higher dividends.

Dividend payment is a process by which companies share its net profit with its shareholders. Good company tend to increase its profits over time. As the profits grow, dividend payment by the company also increases.

This is 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 last 5 years.
Step #3: Also check if dividend per share has grown in 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, company’s net profit is improving.
Dividend per share growth mean, company believes in dividend philosophy.
EPS growth similar to dividend growth means, as company profit will increase in future, its dividend payout will also improve.

DIVIDEND STOCKS VS FIXED DEPOSITS

Why I am comparing dividend stocks with fixed deposits? Because starting yield of dividend stocks are 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 be low, but it improves with time. Moreover, good stocks can yield very stable dividend income in short term.
Long Term Gain: There are two types of gains in 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, but it will never grow with time.

Initial yield of fixed deposit can be better than dividend yield of stocks, but there are some disadvantages as well. Income from 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, 50,000 in a year, you will be taxed only on Rs.50,000 @10%.

LIMITATIONS OF DIVIDEND

If dividend paying stocks are so good, why everyone do 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 dividend one year, and nothing the following year, is also not good. It may happen that a stock which is yielding 8% dividend today, may yield only 0.5% in next FY.
Dividend is high but fundamentals are weak: Few years back Strides Pharma was yielding dividend close to 33% per annum. On Mar’14 it paid dividend of Rs.505 per share. On Mar’18 it paid dividend of only Rs.2 per share. Why it happened? Because EPS of this stock fell from Rs.593 (Mar’14) to Rs.99 (Mar’18).

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, EPS, dividend payout %, etc.

List of Highest Dividend Paying Stocks in India

https://getmoneyrich.com/stocks-list/dividend-stocks/

This is a list of top dividend paying stocks in India in 2020. This list has been prepared based on current price data (27-Jun-2020). These are list of stocks which paid highest dividends to its shareholders in last 5 years.

Terminologies used in the Table:
- Price: Current Market Price (Rs.).
- PAT: Profit After Tax – Net Profit (Rs. Crore).
- Dividend(5YA): Average Lump Sum Dividend Paid in Last 5 Yrs (Rs. Crore).
- Pay: Dividend Payout (Dividend paid as % of PAT).
- 5A: Dividend Yield (Average Last 5 Years).
- C: Dividend Yield (w.r.t. current price)