Do you know that ITC has generated higher returns than HDFC Bank stock in the past 12 months in terms of capital growth? If we take dividend yield into the picture, the difference gets wider. You may ask why we are telling you this.
ITC is considered a dividend stock, whereas HDFC Bank is considered a capital stock. The latter category is expected to outperform the former comprehensively regarding return generation. Yes, there are two kinds of investors in the stock market when it comes to returns – the first category invests for capital appreciation. In contrast, the second category focuses on dividend investing.
So, 🤔 what is dividend investing and how to invest in dividend stocks?
This article gives a beginner overview of dividend investing in 2022 and beyond.
👉 What is dividend income?
The concept of dividend income is similar to earning interest from bank deposits, typically from a savings account.
The primary reason you invest in a company is that they seem profitable to you. Therefore, you undertake online investing after forecasting that these brands will share a portion of their profits with you. Dividend refers to a payout of a part of a company’s profit to eligible equity holders and is usually issued by publicly listed companies.
Dividend income is one of the safest ways to grow your capital.
👉 What is dividend yield?
Dividend yield refers to the percentage of returns you make in dividends by investing in stocks. In most cases, dividends payout is based on the number of stocks you hold.
- For example, you have 20% of its stake purchased by paying Rs. 1,000 crores.
- In the last quarter, the company earned a profit of Rs. 200 crores and decided to pay out half of its profit, i.e., Rs. 100 crores, to all its eligible equity shareholders.
- So you receive 20% of it, i.e., Rs. 20 crores.
- Your dividend yield, in this case, is Rs. 20 crore divided by Rs. 1,000 crore, which is 2% quarterly. So it converts to an 8% annual dividend yield for your investment.
👉 How do you find stocks for dividend investing?
First thing first, the dividend investing strategy is primarily for long-term investors. Given that dividend is paid out of profits, it would be reasonable for you to chalk out companies with growing profits. The next step is to figure out their dividend payment history. If the company has a history of regular dividends, it can be a good choice.
In most cases, good dividend-paying companies are also decent capital builders, i.e., their stock prices also grow with time, albeit at a slower rate than other companies. But if the stock price is stagnant or falling over time, there can be some underlying issues, and these companies can soon reconsider their idea of paying dividends. So, these stocks lack reliability, which is an excellent deterrent for dividend investing.
Another way to measure dividend stocks is by their dividend payout ratio. While a higher payout may seem more lucrative, it can impact its ability to grow in the long term. Conversely, a low payout ratio shows sustainable and consistent growth and that it is reinvesting the remaining part of the profits to expand its business. In contrast, a steadily rising dividend payout ratio indicates a healthy company in a mature industry.
Here are some of the best dividend paying stocks in India
|Company Name||CMP||Dividend Yield %|
|Power Grid Corp||209.15||4.66|
Dividend investing is a great way to establish regular income. It helps fulfil your aim of generating passive income without taking abnormal risks. In addition, dividend stocks are known to counter volatility and boost your financial goals with greater ease.