Why best dividend-paying stocks are a safest, most consistent and smart way to build great wealth
The best dividend-paying stocks to buy are often ones that can both afford to pay shareholders a meaningful yearly dividend – preferably a sustainable and growing one – and offer a solid capital gain.
The longest bull market in history has blown up in spectacular fashion, due to the coronavirus pandemic that has shut down economic activity all over the world. As a result, investors have been sent scrambling to search out the safest and best dividend-paying stocks to buy.
In the current correction, valuations have become attractive in several pockets. Stocks that yield high dividends have a dual advantage. The stock price goes up when the market recovers and the dividend income earned also stays.
In this article, I will demystify the concept of dividends, explain the various terms associated with it as well as list out the top dividend-paying companies in India in 2020.
History of dividend
In the financial history of the world, The Dutch East India Company was the first recorded (public) company ever to pay regular dividends. The Dutch East India Company paid annual dividends worth around 18 % of the value of the shares for almost 200 years of existence (1602–1800).
Each share of stocks is actually a piece of ownership in a real business. When we buy a share of the company, we became a partial owner of the business. And as a partial owner, we are entitled to a share of the profit that the business generates.
Most mature companies will do two things with their profits
- They will reinvest some of their profits back into the business to grow it.
- They will return some of their profits to the owners /shareholders.
Profits that are returned to the owner/shareholders are called DIVIDEND.
Key Dividend Dates
There are five key dates to keep in mind when holding dividend-paying stocks:
- The declaration date is the date on which the board of directors announces and approve the payment of a dividend. The declaration includes the size of the dividend and announcement of the record date and payment date.
- This is one trading day before the ex-dividend date, that is, existing shareholders and anyone who buys the shares on this day will receive the dividend.
The ex-dividend date is usually two business days before the record date. If anyone purchases a stock on an ex-dividend date or after, they will not receive the next dividend payment.
- When an organization declares a dividend, it sets a record date when you must be on the organization’s books as a shareholder to receive the dividend. Companies use this date to send proxy statements, financial reports, and other information.
- The payment date is the date on which the dividends are credited to the shareholder’s account.
Dividend yield refers to a stock’s annual dividend payments to shareholders, expressed as a percentage of the stock’s current price.
Dividend stocks are a little cash machine. That’s the beauty of dividend investing
- It’s simple
- It’s powerful
- And it’s one of the best-proven ways to create long term wealth.
It’s important to realize that a stock’s dividend yield can change over time, either in response to market fluctuations or as a result of dividend increases or decreases by the issuing company.
Let’s understand this with a real-life example of Infosys limited: Top dividend stocks
Suppose anyone who bought 100 shares of Infosys in April 2009, and he still hold the share in April 2020. Let’s see how it worked:
Face value: 5
|Year||Dividend %||Dividend Per Share||No of shares||Total Dividend||Bonus|
|Total Dividend paid||Rs 1,20,350|
Let’s summarize the whole period: from 2009 to 2020
|Share price||180||650||As on 23/4/2020|
|Number of shares||100||800||With bonus|
|Cost of purchase||18000||520000||Present value|
|Dividend paid||2350||18000||(800 Shares) 2019|
|Dividend Yield||13.5 %||100%||On Initial cost|
|Total dividend received from 2009 to 2020: Rs 1,20,350|
Here we clearly observed that dividend yield had improved significantly from 13.5 % in the year 2009 to 100% in 2020. And the same time valuation of Infosys share has increased to Rs 5,20,000 from just Rs 18000!!!
Just by holding fundamentally strong companies for the long term, one can easily create good wealth.
A powerful strategy for Picking the top dividend-paying stocks
As with any investment, it is imperative to do your research when choosing a dividend stock. When searching for dividend stocks, it’s important to keep in mind that a high dividend yield alone doesn’t make a stock a great investment. There are several things you should consider before investing, including:
We should probably look at dividend-paying stocks that have been around for a long time.
- Companies that have been paying a dividend every year for a long time are likely to continue to do so.
- Companies that have been increasing their dividends every year for a long time are also likely to continue to do so.
To identify potential dividend stocks having strong fundamental we should look at traditional valuation tools:
- Last 5 years of sales and profit growth
- PE ratio and Book value
- Check whether EPS has grown in the last 5 years
- Check whether dividend per share has grown in the last 5 years
- Check if EPS and dividend per share growth are similar
EPS growth similar to dividend growth implies if company profit increase in the future, its dividend payout will also increase.
- The company’s outstanding debt structure will also be important to understand, as a corporation’s creditors will get paid before the shareholders in any financial downturn.
Management and Dividend History:
- Look for companies with management teams that have a reputation for being investor-friendly.
- Consider the management’s historical treatment of dividends and share buybacks. Has management ever suspended or lowered its dividends?
- Has the company consistently grown its cash reserves and increased its dividend yield over the years?
To make a well-informed decision of whether dividend stocks are suitable for you, evaluate their pros and cons. The following are the advantages and disadvantages of dividend-paying stocks:
The Advantages of Top Dividend-paying Stocks
Typically, an organization can only pay a consistent dividend when it has a regular stream of earnings. As a result, most organizations with a long dividend history are reliable, “blue-chip” stocks that have a predictable cash flow. Top dividend-paying stocks tend to be less volatile than the overall market and constantly in demand, helping to support the long-term stock price.
Gain two ways to win
With dividend stocks, you have two ways to win: when the share price rises and when the company pays you a dividend check. If the share price rises by 10 percent and the company pay a 5-percent dividend, you pocket a 15-percent profit, minus taxes.
Hedge against inflation:
The big advantage dividends stocks hold over other income-generating investments is that they have the potential to keep pace with inflation. As prices rise, profits also tend to rise, and subsequently, companies raise their dividend payments.
Long term buy-and-hold advantage
Dividend investors are generally more committed than non-dividend investors. They’re in the market for a considerable period of time and want to own shares in companies that deliver returns in good times and bad. As a result, dividend shares tend to outperform non-dividend shares when the market correct. Stocks that offer only capital appreciation through rising stock prices have a minimum chance of providing a positive return when stock prices are falling.
Also read: PTC India limited
The Disadvantages of high Dividend yield Stocks
Dividends suffer from the burden of double taxation. First, the income that’s earned by a company is taxed by the government at the company’s tax rate. Then, you’ll have to pay tax on that dividend when you file your return. If a company chooses to reinvest its profits rather than distribute them to shareholders, the double taxation problem can be avoided.
Low growth, low Income:
The finest dividend stocks are often bigger, more established businesses that are more reliable than explosive when it comes to earnings. Although a regular income stream is attractive, growth investors tend to shy away from blue-chip companies in favor of more aggressive growth-oriented companies.
Risk of Dividend cut:
If a company’s dividend per share is too high, it might be unsustainable going forward. If that dividend gets cut in the future, the stock price could suffer heavily.
list of top 10 dividend paying stocks that can be considered for investment on the basis of good corporate governance, fundamentals and dividend yield
(As on 23/04/2020)
|Sr No||Name||Market Cap (Rs in Crs)||CMP||Div per share (Avg last 3 years)||Div yield|
India bulls Housing Finance
Indian Oil corporation
Balmer Lawrie Investment
Long-term dividend investing can be an excellent choice if you are looking to create great wealth over time.
People shouldn’t buy on one go, buy-in a phased manner. Cost averaging into stock is a great way to avoid ‘Analysis paralysis” The point is to keep accumulating these stocks overtime at many different price levels.
“BEST DIVIDEND PAYING STOCKS” blog is dedicated to those who believe that wealth can be created in the stock market and long-term investment horizon significantly reduced short term market volatility.