Earn - ProfitablePursuits

Cracking the Dividend Code: 5 Key elements to understand for planning Consistent Income.

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!

Blogs

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.

The Rise of Decentralized Finance: Unraveling the Mysteries of Cryptocurrency

In a world filled with curiosity and controversy surrounding cryptocurrencies, few dare to delve into their intricacies. The complexity of this innovative digital realm often hinders understanding, leaving many hesitant to explore further. As a software and electronics engineer, I myself embarked on a challenging journey to comprehend its intricacies, and though I still have much to learn, I am eager to share my knowledge through a series of enlightening blogs. Welcome to the inaugural post, where we will begin by uncovering the genesis of cryptocurrencies and exploring the myriad advantages they bring to the table. Moreover, we will venture into the realm of traditional banking systems, unveiling the stark differences that set this groundbreaking solution apart.

Unmasking the Pitfalls: Common Issues with Conventional Banking Systems.

Soon after the 2008 economic crash, a group of forward-thinkers dared to question the safety of traditional banks as custodians of their hard-earned money. They yearned for a financial landscape beyond the confines of banking, driven by a desire for change. Let’s uncover the common pitfalls they identified, shedding light on the problems that led them to seek alternatives to traditional banking systems.

Banks had too much control: People felt that banks and governments had too much power over their money. They worried that this could lead to problems like censorship, freezing of accounts, or restrictions on accessing funds.
Privacy concerns: Traditional banks often required individuals to share personal information during transactions, which invaded their privacy.
Banks were Expensive middlemen: Using banks for transactions often involved many middlemen, like banks, payment processors, and clearinghouses, which added extra costs. This was even more evident when there were international transactions taken up by people.
Simplified Access for everyone: Some people didn’t have access to traditional banks, especially in poorer areas.
Security and trust: There were concerns about fraud, hacking, and data breaches in traditional banking.
New possibilities: Cryptocurrencies opened up new ways of doing things in finance. They made it possible to create smart contracts, decentralized apps, and digital money that could change how we handle money and other financial activities.

Exploring Traditional Transactions : Unveiling the Role of Banks in Conventional Financial Interactions

In this section, we will delve into the intricacies of conventional transactions facilitated by banks, shedding light on the fundamental processes involved. From initiating a transaction to its completion, we will examine the role of banks in facilitating financial interactions between individuals, uncovering the inner workings of the traditional transaction landscape.

Let’s consider a hypothetical transaction between Rama and Lakshmana as an example.

Agreement on Transaction: Lakshmana and Rama agree on the cost of the work done, and Rama wishes to pay Lakshmana the agreed amount of Rs.100/-.
Approach the Bank: Both Lakshmana and Rama visit the bank to initiate the transaction. They inform a bank representative about their intention to transfer funds from Rama to Lakshmana.
Providing Information: The bank asks Lakshmana and Rama to provide the necessary information, which typically includes their account details, identification, and transaction details (such as the amount and purpose of the payment).
Bank Server Entry: The bank representative enters the transaction details into the bank’s server. They perform three entries: deducting Rs 100/- from Rama’s account, adding the same amount to Lakshmana’s account, and deducting service fees of Rs 5/- from both accounts for the banking services rendered.
Transaction Completion: Once the entries are made, the transaction is considered complete. The funds are transferred from Rama’s account to Lakshmana’s account, and the bank deducts service fees for facilitating the transaction.

Key Points:

Personal Information: Banks require personal information from both parties to ensure the legitimacy of the transaction and comply with regulatory requirements.
Bank’s Authority: Transactions in the conventional system depend on the bank’s authority and involvement. They act as intermediaries and gatekeepers in the transfer of funds.
Service Fees: Banks charge service fees for providing their banking services, which are deducted from the involved parties’ accounts.
Concerns: This traditional process raises concerns related to privacy, reliance on centralized authority, and the cost associated with banking services.

Exploring Decentralized Finance : Unveiling the technology under investigation.

Let’s consider the same hypothetical transaction between Rama and Lakshmana as an example to understand decentralized finance comparatively.

Decentralized Network: In a decentralized finance system, each participant (Rama, Lakshmana, Ganesh, Parvathi, Vishnu, Shiva ….) has their own server connected to a network. There is no Banker essentially at the center.
Transaction Intent: Rama, wanting to pay a specific amount Rs. 100/- to Lakshmana, publicly announces his intention to make the payment over the network. This announcement is visible to all participants.
Transaction Acceptance: Lakshmana, in response, publicly announces his acceptance of the specified amount Rs 100/- from Rama. This acceptance is also visible to all participants in the network.
Recording on Servers: All participants, including Rama and Lakshmana, record the transaction details on their respective servers. This creates a distributed ledger where multiple copies of the transaction record exist across different servers.
Transaction Confirmation: The network participants validate and verify the recorded transactions using consensus mechanisms such as proof-of-work or proof-of-stake. This ensures the accuracy and integrity of the transaction history.
Transaction Completion: Once the network reaches a consensus on the validity of the transaction, it is considered complete. The funds are effectively transferred from Rama to Lakshmana, and the transaction details are permanently recorded in the distributed ledger on each participant’s server.

Key Points:

Decentralized Network: Participants maintain their own servers connected to a global network, eliminating the need for a centralized authority like a bank.
Public Announcement: Transaction details are publicly announced to ensure transparency and visibility among network participants. In the real scenario there will be code names that shall be used by every customer so that the other people in the network do not know who the real person owning the account is.
Distributed Ledger: Transactions are recorded on multiple servers, creating a distributed ledger that is resistant to single points of failure or manipulation by one single person in the node.
Consensus Mechanism: Participants collectively verify and agree on the validity of transactions, typically through consensus algorithms, ensuring the integrity of the system.
No Transaction fee : It shall be observed that there is no transaction fee involved in this transaction by the middleman and also it is country agnostic.

While decentralized systems offer numerous benefits, they do present challenges that need to be considered.

It is not practical for everyone to have servers at their homes like banks in order to participate in decentralized networks. The requirement for individuals to set up and maintain their own servers poses challenges in terms of technical expertise, cost, and infrastructure. Many people may lack the necessary knowledge or resources to establish and manage servers effectively.

For non-tech-savvy individuals to engage with decentralized networks, user-friendly interfaces and simplified tools need to be developed. The user experience must be intuitive and accessible, eliminating the need for deep technical understanding. However, achieving this level of usability remains an ongoing challenge.

Another concern relates to potential misuse of decentralized systems. Since transactions are publicly recorded on the network, there is a perception that it could enable illegal activities, including money laundering. While decentralized systems prioritize privacy and security, they should also adhere to regulatory frameworks and address concerns related to illicit activities. Striking a balance between privacy and compliance is crucial for widespread adoption and acceptance of decentralized finance.

The Real Mystery : Who Feed these systems with money ? What is Cryptocurrency?

In the realm of decentralized finance, a crucial question lingers: Who breathes life into this groundbreaking system by injecting money? Unlike conventional banking, where governments play a central role (Sovereign), the origins of cryptocurrencies and their initial injection into the network are shrouded in intrigue.

Stay tuned for the upcoming blog, where we’ll delve into the captivating tale of how money finds its way into this revolutionary network. Don’t miss out on this eye-opening exploration! In the meantime, make sure to like, share, and spread the word about this blog to your friends and family.

Blogs