Benefits of investing in dividend yielding stocks | 5paisa (2024)

What are dividends?

A shareholder's total benefit from stock ownership comes in the form of capital appreciation (a rise in the price of the shares) or dividends. Dividends are periodic payments made by companies to shareholders from their earnings. They can be made primarily in cash, but also in the form of stocks or other property.

What are dividend stocks?

A dividend stock is the stock of a company that regularly pays out large dividends to its shareholders out of the money it makes. Typically, dividends are paid by established, profitable firms. Companies that do not pay dividends do not, however, always lack profitability. Some businesses distribute final dividends and interim dividends more than once a year.

Benefits of Investing in Dividend Stocks:

- Great source of passive income: Dividend-paying stocks are one of the most straightforward ways for investors to generate passive income. After analysing dividend-paying companies, a dividend portfolio can be created. This will provide the company's shareholders with a consistent source of income that is comparable to the interest they receive from saving money for a longer period of time.

- They are far less risky than others: Even if the markets are negative or a certain economic catastrophe occurs, the value of high-dividend companies remains stable. They are hence less risky than other growth stocks. The finest aspect of dividend stocks is that they restore value amid volatile market fluctuations, making them a dependable capital protection alternative for investors. When these equities are included in a portfolio, the risk profile is adequately diversified.

- Assists you in reinvesting dividends: When an investor receives dividend payments, they can use them for personal expenses or reinvest them in the same stock. Using dividend payouts to reinvest in the same stocks can help investors deliver consistent returns on their investments thanks to dividend compounding.

- When investors reinvest dividend payouts in the stock market on a regular basis, they can effectively boost returns.

- They offer Dual Benefits To Investors: Dividend stocks, while not having a higher growth potential than growth stocks, do have the potential for value appreciation. Investing in dividend stocks allows investors to reap the benefits of both capital appreciation and consistent regular income. For example, an investor can buy a high-dividend stock and reap the benefits for several years. Later, they can sell their investment to make a handsome profit.

- They Aid in the Fight Against Inflation: While the inflation rate continues to rise on a daily basis, it is critical to make effective and inflation-proof investments. This can be accomplished by investing in dividend stocks, particularly high-dividend growth stocks. Growing dividend yields will help you combat and eliminate rising inflation.

- They are less susceptible to market volatility: With dividend stocks, investors do not have to devote their entire time and energy to tracking stock movements or other market movements. Dividend stocks are very strong and stable companies that are less prone to market volatility and have fewer price swings. To begin investing in dividend stocks, all an investor needs is a simple "buy and hold" strategy.

What are the factors to consider before investing in dividend stocks?

1. Dividend yield: The dividend yield is a representation of a stock investment's return on dividends alone. While a stock's dividend may remain stable from quarter to quarter, its dividend yield can fluctuate daily because it is tied to the price of the stock. As the price of the stock rises, the yield falls, and vice versa. Due to the fact that dividend yields fluctuate in response to stock prices, they can appear abnormally high for fast-declining stocks.

The dividend yield is calculated using the following formula: Dividend Yield = Cash Dividend per Share / Market Price per Share * 100.

2. Dividend Payout ratio: The amount of dividends paid to shareholders in relation to the total amount of net income the business makes is known as the Dividend Payout Ratio (DPR). The dividend payout ratio is calculated by dividing the total dividend paid out to shareholders by the company's total earnings for the year. The formula for computing the Dividend Payout Ratio is Dividend Payout Ratio = Dividends per Share (DPS) / Earnings per Share (EPS).

In general, a dividend payout ratio between 30 to 50% is regarded reasonable, however anything above 50% may be unsustainable.

The following is a list of some of the highest dividend-paying Indian stocks:

1. REC Ltd:

REC is a Central Public Sector Undertaking under the Ministry of Power involved in financing projects in the complete power sector value chain from generation to distribution.

The company declared an interim dividend of Rs. 5. The ex-date for the dividend is 7th November 2022. The company has a dividend payout ratio of 30.11% and a dividend yield of 10.31%. In the last one year, the stock price rose by 10%. The Market capitalization of the company is Rs. 29216 crores.

2. National Aluminium:

NALCO is engaged in the business of manufacturing and selling of Alumina and Aluminium. The Company is the lowest-cost producer of metallurgical grade alumina in the World and the lowest-cost producer of Bauxite in the world as per the Wood McKenzie report.

The company declared a final dividend of Rs. 1.50. The ex-date for the dividend is 15th September 2022. The company has a dividend payout ratio of 40.44% and a dividend yield of 8.39%. In the last one year, the stock price dropped by 14.6%. The market capitalization of the company is Rs. 14335 crores.

3. Coal India:

Coal India Ltd is mainly engaged in the mining and production of Coal and also operates Coal washeries. The major consumers of the company are the power and steel sectors. Consumers from other sectors include cement, fertilizers, brick kilns, etc.

The company declared an interim dividend of Rs. 15. The ex-date for the dividend is 15th November 2022. The company has a dividend payout ratio of 54.29% and a dividend yield of 7.42%. In the last one year, the stock price rose by 43.9%. The market capitalization of the company is Rs. 141435 crores.

4. GAIL (India):

GAIL is an integrated natural gas company in India. It owns over 11,500 km of natural gas pipelines, over 2300 km of LPG pipelines, six LPG gas-processing units and a petrochemicals facility.

The company declared a final dividend of Rs. 1. The ex-date for the dividend is 1st August 2022. The company has a dividend payout ratio of 23.30% and a dividend yield of 7.16%. In the last one year, the stock price rose by 5.8%. The market capitalization of the company is Rs. 61148 crores.

5. Oil India:

Oil India Ltd is engaged in the exploration, development, and production of crude oil and natural gas, transportation of crude oil, and production of LPG. It also provides various E&P-related services for oil blocks.

The company declared an interim dividend of Rs. 4.5. The ex-date for the dividend is 21st November 2022. The company has a dividend payout ratio of 21.55% and a dividend yield of 6.78%. In the last one year, the stock price dropped by 4.6%. The market capitalization of the company is Rs. 22615 crores.

Note:

There are several advantages to investing in dividend stocks for investors. Whether undertaken by risk-takers or conservative investors, dividend stock investments can result in reasonable long-term returns.

Before investing in dividend-paying companies, it is always advisable to conduct your own research. By doing so, one can ensure that their investment capital is allocated appropriately and will create consistent, assured returns.