Introduction:
Dividends, the distributions of a portion of a company’s earnings to its shareholders, play a crucial role in the financial landscape. In this section, we will explore the concept of dividends and delve into the reasons why companies choose to pay them out. Understanding dividends is essential for investors seeking stable income streams and long-term wealth accumulation.
Why do companies choose to pay Dividend to Investors ?
Dividends represent a portion of a company’s profits that is shared with its shareholders. By paying dividends, companies reward their shareholders for their investment and participation in the company’s growth. This practice is not only a means of showing appreciation but also a strategic move to attract investors by offering an incentive beyond capital appreciation. Dividends can be a sign of a healthy and well-established company, instilling confidence in investors and attracting long-term shareholders.
In the above example, it can be observed that the company has consistently earned money year over year (YOY) and distributed dividends to investors, amounting to over 30-40% of its annual earnings. The remaining earnings are retained in the company’s balance sheet for reinvestment and further growth.
Consistent dividend payments distinguish good companies, while the mark of great companies lies in their consistent dividend increases over time. By maintaining a reliable dividend payout, good companies demonstrate their commitment to rewarding shareholders. On the other hand, great companies exhibit their exceptional financial strength and growth potential by consistently raising dividends, showcasing their ability to generate sustainable profits and create long-term value for investors
Why should one consider dividend yielding stocks in their portfolio?
If you had purchased TCS shares at Rs.140/- in the middle of 2005 and held onto them until now, not only would the stock have risen to Rs.3500/-, but you would by now also have started receiving approximately Rs.50/- per year as dividends.
Power of Dividend for long term investors.
Dividend Compounding : Investing in the right company and holding onto the shares for an extended period can yield remarkable results. Imagine purchasing shares of a company today at Rs.100 /- and remaining invested as the company grows and prospers over the decades. In such a scenario, it is entirely possible that after a few decades, you could receive an annual dividend of Rs.100 /- for each share you own, in addition to the substantial appreciation in the share price that occurred over the years.
During the stock market crash caused by COVID, had you purchased Karnataka bank stocks at Rs.35/-, you would now be receiving Rs.4/- or more as dividends every year, according to their dividend policy. This would represent a return of over 10% annually, excluding any potential stock price appreciation.
Buying Dividend yielding stocks at the right time.
Steal Deals: Dividends are not solely a long-term game; they also provide short-term opportunities for investors to achieve attractive yields. By making astute stock purchases at opportune moments, it is possible to generate returns that surpass traditional fixed deposit rates within a few years. With dividends often increasing over time as companies expand, investing in dividend-paying stocks presents the potential for substantial returns that go beyond long-term strategies. This dynamic nature of dividends allows investors to benefit from both short-term income and long-term growth, making them a compelling option for maximizing investment gains.
What factors do I considered when determining the appropriate allocation of dividend yielding stocks in my portfolio?
Dividend income can play a crucial role in retirement planning ( This need not be at 60 but when planned well can happen much earlier ). As individuals approach retirement from their 9 to 5 job , they often seek stable and reliable sources of income to support their lifestyle. Dividends can provide a steady stream of passive income, as many companies distribute a portion of their earnings to shareholders on a regular basis. This dividend income can serve as a valuable addition to other retirement income sources.
By investing in dividend-paying stocks or funds, retirees can potentially enjoy a consistent cash flow that helps cover living expenses and maintain financial security throughout their retirement years. Additionally, dividend income can offer a hedge against inflation, as many companies increase their dividend payouts over time, helping retirees preserve the purchasing power of their income. Overall, incorporating dividend income into retirement planning can provide retirees with a reliable and potentially growing source of funds to support their post-career lifestyle.
Some of the key elements I consider before adding dividend stocks to my portfolio.
- While my main focus is on growth stocks, I’m open to attractive dividend yields in the market, such as the Karnataka bank example mentioned earlier. A balanced approach, combining both growth and dividend-yielding stocks, can optimize portfolio returns.
- I believe that dividend-yielding stocks are more suitable for retirement planning, and I do not think it is advisable to add a significant number of dividend stocks to my portfolio early in my career. Doing so could potentially limit the growth potential of my capital.
- Even during retirement, I don’t believe in allocating all my funds to dividend-yielding stocks. I understand that the decision to distribute dividends lies solely with the board of the company, and as a shareholder, I have no direct control over it. Dividend-yielding stocks form only a partial portion of my portfolio. For the remaining portion, I prefer investing in corporate bonds and fixed deposits.
What strategies or methods I employ to identify dividend yielding stocks?
Whether I’m investing for stock price appreciation or dividends, the fundamental checks I perform remain largely unchanged. However, when it comes to dividend-yielding stocks, there are certain liberties and considerations I take into account.
- Will the products that the company is selling today still be in demand after a decade?
- Does the company have a policy that mandates the payment of dividends during the normal course of business?
- Has the company consistently paid out dividends in the past?
- Are the company’s financials healthy – company shall pay dividend from its free cash flow and not via debt or equity dilution?
- Are the promoters clean?
- Am I getting the stock at the right Valuation ?
- Is the dividend yield, both in terms of percentage of earnings and absolute value, growing? ( Dividend Compounding ).
- Is the company growing steadily, even if it’s at a slow pace? ( For Steal Deals).
How can one stay updated on dividend-yielding stock performance while minimizing ongoing monitoring efforts?
I don’t believe in adopting a “buy and forget” strategy for dividend-yielding stocks. While it is possible to reduce the amount of time spent on monitoring these stocks, complete disregard is not advisable.
Event-based monitoring is crucial. By staying informed through stock exchange filings and public news, one can obtain important information about the company as it happens. It is essential to dedicate some time to analyzing the impact of such events on the company and devising an exit plan if necessary.
Periodic monitoring is also important. The same fundamental questions I asked before buying the stock remain relevant. Therefore, I would review these aspects every six months and continue to stay invested as long as all indicators remain positive.
Finding a balance between reducing monitoring time and staying informed is key to effectively managing dividend-yielding stocks. By staying vigilant and periodically evaluating the company’s performance, one can make informed decisions while optimizing their investment strategy.
Summary.
Let me conclude this blog by leaving some intriguing thoughts in the minds of the readers.
- Envision a day when your monthly expenses are effortlessly covered by the dividends you receive, providing you with financial security and peace of mind.
- Envision a day when the company you invested in has experienced substantial growth over time, resulting in consistent dividends that match or even exceed the initial purchase price of your stocks.
- Now, picture all of this unfolding after you retire from the traditional 9-5 job, allowing you to enjoy a fulfilling and worry-free lifestyle.
These possibilities demonstrate the potential power of smart investment decisions, strategic planning, and the long-term benefits that dividend stocks can offer. As you navigate your financial journey, consider the potential rewards that await you when you embrace the world of investing and make informed choices for your future.
Here’s the Comprehensive List of Our Blogs: Keep it Handy, Share with Friends and Family, Smash that Like Button, and Subscribe to Receive Blog Updates First. Your support fuels our passion for creating insightful content!
Disclaimer: This blog post is intended for informational purposes only and should not be considered as financial advice. Always conduct thorough research and consult with a qualified financial professional before making investment decision.