There are a significant number of phrases such as return, profit, and growth associated with stock market investment. However, dividends present a unique, and often overlooked, angle from which dividends can serve as an invaluable source of earning through stocks.
In this blog, we explain what the various types of dividend paying stocks are, including their functioning and usefulness in making a smart investment portfolio.
What Is A Dividend?
Dividends are profits released from a company’s earnings which are provided to the owners of the shares. For instance, when a shareholder owns stocks in a company that is profit making, the company in some circumstances might distribute a proportion of earnings back to the shareholders in the form of cash or additional stocks. This is termed as a dividend.
There are some companies which do not provide dividends. In most cases, only strong and well-established companies consistently pay dividends.
What Are Dividend Paying Stocks?
Dividend paying stocks refer to shares of companies that are termed as dividend recipients regularly. The stocks are majorly referred to as a source of income for long term investors.
How Are Dividends Calculated?
Consider the scenario in which you hold 100 shares of a company and the company announces dividends of 5 Rupees for every share. In this scenario, you will have:
100 shares x 5 Rupees = 500 Rupees as income from dividends.
Corporates often announce dividends:
Once a year.
Twice a year.
Every 3 months.
The performance of the company and its dividend policy determines how often and the amount dividends are paid.
Reasons for investing in companies that pay dividends
Dependable Income Stream:
Dividends suggest a reliable income, which acts as a cash inflow source especially for retirees and people who are looking for passive sources of income.
Lesser Risk:
Dividends paying companies tend to be larger and financially sound, thus less risky compared to smaller or unproven companies.
Long-Term Wealth Creation:
Reinvesting the dividends received to purchase additional shares aids in the compounding of wealth long term.
Tax Benefits:
This varies from country to country. In the case of India, dividends are declared as income and taxed, but does not nullify the fact that it can be a useful stream of income for small investors.
Note: Prior to making any investments, conducting independent research is crucial or seeking guidance from a financial advisor is always recommended.
Strong dividend yield could also be regarded as a good indicator when considering investment. It is regarded as the rate at which the dividends are being paid in relation to the price of equity shares.
Dividend History - Verify whether or not the organisation has paid dividends consistently over the years.
Payout Ratio - This shows how much profit is being paid out in the form of dividends.
Company Fundamentals - Strong earnings, low debt, and good growth prospects are indicative of a sound company.
Final Thoughts
Investing in dividend paying stocks can complement your investment portfolio, especially if you want to receive periodic income alongside capital appreciation in the long term. In addition to price appreciation, these stocks also provide a portion of the profits as dividends.
High-quality dividend stocks, regardless of whether you are a novice or a seasoned investor, will promote financial independence over time.
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