History says that high dividend paying stocks outperform the market in long run. When I ask people to invest in this category of stocks, they just look at me with amazement. What they like more is capital appreciation.
Generally, people underestimate the power of dividend income. I have got a live example of a person who is living on dividend income – this man received Rs.180 crores as dividend over the past 35 years.
Let me clear it out.
There are 2 types of benefit from stock market:
- Capital Appreciation
- Dividend Income
For a second, imagine yourself as a cattle farmer. You bought a cow, feed it and fetched some milk to earn income from dairy products.
Apart from this, after 2 year, due to high demand of cow in the market, you sold it at double price.
That’s how people earn in the stock market. They buy stocks at low, retain dividends (like the farmer earned from dairy products) and then sell it at high (like the farmer sold it after 2 years).
So the profit earned from selling high is Capital Appreciation Profit and the sum of money paid regularly (typically annually) by a company to its shareholders out of its profits is known as Dividend Profits. In short:
- Capital appreciation = profit from price fluctuation in stocks = from selling cow at double price.
- Dividend profits = time to time dividend distribution = income from dairy products.
So while you earn from dairy products you still have that cow but after selling the cow you’ve nothing as a source of income. Same as, while you receive dividends, you still have that stock but after you sell it, you’ve nothing as a source of income.
Truly speaking, nobody gives a shit to dividend paying stocks. They like capital appreciation more than dividend profits.
No doubt profits from dividends are much lower than capital appreciation but what if I say there is a high correlation between both of them.
If you look at the portfolio of the most successful investor of all time – Warren Buffet then you can find that all of the top holdings in his portfolio have high dividend paying stocks with high payout and yield.
But it doesn’t mean that the company with low or no dividends are crap. Here’s the authenticity – World’s most expensive stock (It cost more than 1 crore in INR) – Berkshire Hathaway (class-A) don’t pay dividends at all.
“A number of Berkshire shareholders — including some of my good friends — would like Berkshire to pay a cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves” Warren Buffet wrote in his 2012 letter to investors.
The company has paid only one dividend of 10 cents during his reign, in 1967, and Buffett later joked he must have been in the bathroom when the decision was made. Buffett uses that cash to grow company financials that eventually contribute to shareholder wealth. The result is: Company’s stock price increased by almost 700,000% between 1964 and 2016.
So the conclusion is:
- Company paying high consistent dividends is an excellent company. It’s a universal truth.
- Company paying inconsistent or low or no dividends may or may not be an excellent company.
However, in this article, I’ll talk about how to find top dividend paying stocks but before let us talk about some pros and cons. And I bet – your every doubt related to dividends will get vanished by you reach the end, if not, leave a comment.
- Financial ratios associated with dividends
- Top dividend paying stocks in India
- Regular income
- Indicator of cash within company
- Other corporate actions than dividends
- Flaws associated with dividend distribution
- Beware of high dividend payouts
- Where and How to find high dividend paying stocks?
- Some FAQs
Financial ratios associated with high dividend paying stocks
There are only 3 primary ratios associated with dividend:
A dividend expressed as a percentage of a current share price. The yield is the percentage of a stock’s market price a company returns in dividends. A stock that pays an annual dividend of INR 5 and is trading at INR 100 a share has a yield of 5 percent.
This is the best measure for dividend as compared to others because it takes current market price into account to calculate the ratio. Formula is as follows:
DY = (Dividend/Current market price)*100
It is the expression as a percentage of face value of the share. This ratio is useful to measure the trend of company’s dividend over a long period as it is calculated on a common base of constant face value. However, some corporate actions like stock split can break the trend. Formula is as follows:
D% = (Dividend/Face value)*100
It is the part of net profit which is distributed to shareholders. In other words, the percentage of Earning Per Share (EPS) which is paid to shareholders as dividends. In a while, we will further discuss this ratio in detail. For now, just peek the formula:
DP = (Dividend/EPS)*100
Side note: Each ratio has its own importance and sooner or later are used at different phases.
Top high dividend paying stocks in India
|No.||Name||DY %||DP %|
|3||Oracle Fin Serv||18||531|
|9||IL and FS||7.5||76|
Data is updated on 8 August’16.
I’ll soon show you how to find dividend stocks but before let us talk about some pros and cons associated them.
My personal bank account has an interest return of 4%. That is why I keep a very low amount of money in my bank account. In lieu, I like to invest in companies which pay high dividends or in other words, which have more than 4% dividend yield.
Matra is simple: Always keep your money work for you. Non-performing money is all eaten up by inflation.
The government is forecasting an inflation rate of 4.8% by 2020. So if I still keep money in my bank account, I’m in loss of 0.8 (4% – 4.8%). There are many stocks which are consistently paying more dividends than returns on a saving bank account.
For example: take NMDC. The company is paying very high dividends and its dividend yield range is 7% to 11% since last 3 years, apart from this capital appreciation of the stock is also excellent since last few months.
Isn’t it a great alternative than keeping your money in banks?
Indicator of cash within company
The dividend is also a good indicator of cash presence in the company. Net profit is used in 2 ways:
- Retained earning
- Dividend payout
Here’s the equation: Net profit = Retained earning + dividends.
Retained earning is that part of net profit which is retained by the company to carry on its operational activity and for further development & expansion.
Dividend payout is that part of net profit which is distributed to shareholders because that was free cash and this shows that company is earning enough to save money for its shareholder after fulfilling its basic operational activities.
Other corporate actions than dividends
There are also many other factors which ultimately add value to shareholders like dividend do. Bonus shares are also be considered as dividends but are paid in the form of equity. Buyback of shares is also an another way to show gratitude towards shareholders. These all eventually add values to shareholders.
Flaws associated with dividend distribution
This is a kind of flaw associated with dividends. After the announcement of dividends, the stock price is compensated on ex-dividend date with the exact amount of dividends announced per share. For example, This year Hindustan Zinc paid the highest amount of dividend of 24 per share. At that time, the stock price was reflected 24 points low on exchanges due to ex-dividend date.
So ultimately you’re benefiting nothing from this corporate action.
Beware of high dividend payouts
Being an excellent company and having an excellent growth prospect is not the same thing. Sometimes the company with high payout lacks of growth in the company.
Because they had already saturated their potential and there is no other opportunity available for them to grow their business, that’s why they are paying a high amount of money to their shareholder.
Let me name few of them – PFC and REC. They both are a good company with high dividend yield. They lack growth because they are already so much matured that there are no rooms left for further growth.
And the company which lacks growth means that they don’t have the potential to become multi-bagger. Return from capital appreciation will be quite low.
Where and How to find high dividend paying stocks?
I’ll show you 3 ways to find dividend stocks. Each and every source has its own importance.
- Google Alerts
Don’t underestimate the power of moneycontrol. It is a great hub of information related to stock market. You can get every information about any Indian stock with few clicks but very few people are aware of it.
Moneycontrol has a feature where they segregate the best high dividend paying stocks. It has a whole dedicated section to easily find dividend stocks at one place, that too rank wise. It somewhat looks like this:
Go on, here’s the link to the page – http://www.moneycontrol.com/stocks/marketstats/nsetopdiv
Screener.in is the best place to filter stocks as per your own personalized criteria. The advantage of screener over moneycontrol is that you can also add criteria other than dividend ratios to filter stocks.
For example, if you want a stock with “more than 20%” dividend payout and “more than 4%” dividend yield then you’ll simply run a query in the query box but what guarantees that the stock is fundamentally awesome.
Only relying on dividend ratios is not the way to get good fundamental stocks. So also add other many ratios like ROE, D/E etc as shown below:
Note – above ratios and % are just for display purpose.
You can also add other queries as per your personal choice. This guarantees that the stock is high dividend paying as well as it has good fundamentals. So screener goes an extra mile.
Related read: How to analyze stocks in not more than 2 hours
Now here comes my favorite one.
Above 2 sources are one-time use only. In other words, it will be cumbersome to check moneycontrol or run a query on screener again and again, to see whether there is any new dividend paying stocks in the list.
So what if you keep someone to work for you. A notifier.
Just sign in to google alerts with your Gmail account and add an alert of “dividend announcement” keyword. You’ll receive an email whenever anything related to dividend rolled out online.
How could I claim my dividend income?
There is no need to claim dividends. The money will automatically get deposited in the registered bank account with your broker. No need to do anything.
However, company will notify you for the same through email, like I receive an email (illustrated below) from ICICI for dividend distribution:
Payment of 21st Dividend for the year 2015-16 through
NECS / RTGS / NEFT / Direct Credit
At the 22nd Annual General Meeting of ICICI Bank Limited (ICICI Bank) held on July 11, 2016, dividend at the rate of ` 5/- per share was declared for the year 2015-16 payable on or after July 11, 2016.
The details of dividend in respect of your shareholding are as under:
(Details not to be shared)
In case of any discrepancy in details mentioned above, please write to our Registrar quoting your Folio No. / DP ID-Client ID.
Senior General Manager (Legal)
& Company Secretary
So don’t worry about the dividends.
Where can I find ex-dividend dates?
I prefer moneycontrol app. You can find it in the section named “corporate action” as shown below.
Is there any minimum number of stocks or time frame to possess the shares to become eligible for the dividends?
No there’s no such regulation. Even if you have one share of a company and if the company declared a dividend of 20, you’ll be entitled to receive Rs 20. But do mind that you hold the stock on ex-dividend date.
What is the ideal rate of dividend yield and payout?
2% or more than 2% of dividend yield and 20% or more than 20% for payout is considered ideal.
When does a person is entitled to receive dividends?
To be entitled to receive dividends you should hold the shares on the ex-dividend date. You will get the dividends on the amount of shares you hold. That’s it.
How many times dividends are paid in a year?
There is no rule for how many times dividend should be paid. However, many companies follow 2 times dividend policy: Interim and final dividends. Even there are many companies which pay dividends thrice or quarterly, like MRF.
What are the tax liability of dividend income in the hands of shareholders?
There is no tax in hands of the shareholders. In case your dividend income alone is above INR 10 lakh, then you’re liable to pay 10% tax on it. More information can be found here: http://economictimes.indiatimes.com/news/economy/finance/budget-2016-with-10-tax-on-dividend-income-rush-of-interim-payouts-likely/articleshow/51217301.cms
Apart from this, Dividend Distribution Tax (DDT) of 15% is paid by the company before they pay dividends.
The curious reader of the blog had raised good queries in the comment section, so also consider reading the discussion below and also, If you’ve any query then leave back a comment.