One of the key lessons from the very famous book ‘Rich Dad Poor Dad’ by Robert Kiyosaki deals with creating passive income portfolios. One needs to start creating sources of passive income instead of working in a J.O.B. (Just Over Broke) setup. Buying investments, starting businesses, and creating items where you work one time and get paid over and over again.
Dividends are just another passive source of income!
What are Dividends?
Dividends are payments made by a company to owners / shareholders of the company. They are a way for companies to distribute profits back to investors, and one of the ways investors earn a return from investing in stock. Dividends are regular payments made to investors who own a company's stock. Not all stocks pay dividends. Dividend stocks can be a great choice for investors looking for regular income. That means dividend-paying stocks can help meet your income requirements and potentially boost your wealth – if you're willing to take on strategic risk. However, keep in mind that dividends can be increased, decreased or eliminated at any point without notice.
Before we move on to identifying the dividend paying stocks, we should understand some frequently used jargons around dividend.
Ex-Dividend Date: The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.
Dividend Yield: It is a measure of the company’s annual dividend divided by the stock price on a certain date. Yield and stock price are inversely related: When one goes up, the other goes down.
Special Dividend: A special dividend is a payout on all shares of a company’s common stock, but it doesn’t recur like a regular dividend. A company often issues a special dividend to distribute profits that have accumulated over several years and for which it has no immediate need.
What are Dividend Stocks?
Dividend stocks distribute a portion of the company’s earnings to investors on a regular basis. Few dividend paying companies even pay investors a set amount each quarter. Once these companies grow, they even increase their payouts over time and hence, offering the investors to build an annuity-like cash stream. Such quarterly cash flow helps the investor to create a source of regular consumable income. However, investors can also choose to reinvest dividends.
Another advantage of dividend stocks is that they generally tend to be less volatile than growth stocks, so they can also help diversify your overall portfolio and reduce risk. Right from stock price appreciation to regular dividend payments, these companies provide a two-fold advantage to investors.
How to identify such Dividend Stocks?
One needs to consider investing in companies that are capable of generating an uninterrupted stream of dividends, perhaps with the potential of increases going ahead. Here are some possibilities to consider:
- Large, blue chip companies with good cash flow and profit histories
- Companies that have a solid record of paying regular dividends
- Companies that have slow and steadily raised their dividends
However, never invest in a company simply because it offers a good dividend. The longevity of that dividend and the health of the share price can depend upon whether the business is sound and has good prospects for the future. Here is a list of good quality dividend paying stocks.
List of Dividend Stocks
|Company Name||Dividend Yield (%)|
|Procter & Gamble Health Limited||13.51|
|Coal India LTD||9.11|
|VST Industries Ltd||3.41|
|Nippon Life India Asset Management ltd||2.76|
|Colgate-Palmolive (India) LTD.||2.38|
|Hindustan Unilever LTD||1.16|
|Metropolis Healthcare Limited||0.8|
*Note -Dividend Yield (%) of past 12 Months as on 24th March 2020
In the long term, dividend stocks tend to have higher dividend payout (amount terms) as the company profits eventually increase with time. If dividend yield is compared with fixed deposit interest rate, one would conclude that the dividend yield is lesser than the interest rate on fixed deposits. However, one needs to consider the growth perspective in addition to the dividend yield.. Though fixed deposits can give fixed interest, but it will never grow with time as the business flourish and continue to grow over a longer term horizon. This has been explained in more detail towards the end of this article
Now, we come to the most difficult decision i.e. identifying the dividend stocks and buying at great price and in right quantities Although the list of the dividend paying stocks is handy and easily available on most of the websites, past returns are not a guarantee of the future performance. Further, every stock goes through the sectoral changes, business cycles, industry progressions and the macro-economic changes. It is very difficult to time the investments. Every stock mentioned in the above table is from a different sector which makes it even more difficult to study the sector specific hindrances as well. In such a scenario, an individual investor more often than not, fails to identify the right sector,right company, right time & right quantity. However, using the benefits of diversification and regular cash flow, StockBasket has come up with a Dividend Champions Basket to overcome these difficulties, as explained below.
Let’s take for an example, during the period of economic downturn i.e. trough of an economic slowdown, most of the companies would often reduce its dividend yield because of the increased pressure on the margins and competitions.
In order to hedge the risk of different sector specific and industrial fluctuations, an investor should look for a pool or a basket of dividend stocks which would mitigate the economic and business risk of different sectors against one another. One such basket is provided by StockBasket – Dividend Champions – where different dividend stocks are pooled together and provided to the investor. The weightage of the individual stock is considered based on the overall risk exposure of that basket. It is very similar to a mutual fund investing in various securities but with a specific focus on dividend yield and lower management fees than a mutual fund. These baskets have been instrumental in beating the returns of the index by a sustainable margin as well.
Past Performance of Dividend Champions StockBasket vs Nifty
Current Value of Rs. 100 invested at the inception of this Basket would be.
Dividend stocks play key role in long term success
Dividend yield (annually) might seem very low when considered for a year or two. However, such dividend stocks have huge long term benefits as the dividend (in money terms) increases with time and magic of Compounding takes over
A simple example can help you understand these calculations much better.
Let’s understand the power of dividends with a simple example -
Suppose an investor (Anil) invests in 1 share of TCS on 1st April, 2010 and holds it till April 2020.
- Share Price as on 1st April 2010 : Rs.403.88/share.
- No of shares bought : 1 nos.
- Amount invested: Rs. 403.88
- No. of shares held in 2019 : 2 nos (1:1 bonus share)
[Note: Bonus shares 1:1 was also issued to all shareholders in 2018]
- Price of TCS as on 27th March 2020 : Rs. 1789.10
- No of Share held - 2
- Price on 27th March 2020: Rs. 3578.2 (1789.10 * 2)
- Capital Gains - Rs. 3174.32 (3578.2 - 403.88)
Dividend given by TCS to its shareholders from 2010 to 2020
|Security Code||Security Name||Company Name||Dividend Year||Dividend
|532540||TCS||TATA CONSULTANCY SERVICES LTD.||2010||18|
|532541||TCS||TATA CONSULTANCY SERVICES LTD.||2011||16|
|532542||TCS||TATA CONSULTANCY SERVICES LTD.||2012||25|
|532543||TCS||TATA CONSULTANCY SERVICES LTD.||2013||24|
|532544||TCS||TATA CONSULTANCY SERVICES LTD.||2014||74|
|532545||TCS||TATA CONSULTANCY SERVICES LTD.||2015||40|
|532546||TCS||TATA CONSULTANCY SERVICES LTD.||2016||45.5|
|532547||TCS||TATA CONSULTANCY SERVICES LTD.||2017||48|
|532548||TCS||TATA CONSULTANCY SERVICES LTD.||2018||44|
|532549||TCS||TATA CONSULTANCY SERVICES LTD.||2019||72|
|532550||TCS||TATA CONSULTANCY SERVICES LTD.||2020||5|
*Note : Bonus shares 1:1 was also issued to all shareholders in 2018
- Total dividend income till April 2020 : Rs. 496.5
- Total Gains - Rs. 3670.82 (Rs. 3174.32 + Rs. 496.5)
It can be clearly seen from above that the investment cost was repaid by the dividend over the period of holding and do not forget the humongous capital gains this stock provided. A total gain of Rs. 3670.82 by owning just 1 stock, IMAGINE, if you had 100 shares, or 1000 shares, or 100,000 shares. This is the true power of dividend paying stocks.
Kindly note: Although past performance is not a guarantee of future results, price moves of these stocks historically have been less than those of non-dividend-paying equities. Because of their income potential, investors are less likely to sell these stocks in turbulent markets, which can temper price swings.
Another important long term advantage of dividend stocks is that if you don’t need the dividend income to support your current lifestyle, you can reinvest the dividends, also known as systematic investing. Reinvesting the earned dividends can further increase the yield. People must invest systematically to accumulate dividend stocks. Then the earned dividends from such stocks must be reinvested.