[List of Dividend Paying Stocks] An example of dividend income: Mr. Mukesh Ambani and his family (HUF) hold about 5.6 crore shares of Reliance Industries (0.85%). As declared in Mar’21 annual report, RIL paid a dividend of Rs.7/share. At this rate, the family would have earned a whopping Rs.39.2 Crore only in dividends of RIL.
People like capital appreciation more than dividend income. Why? Because dividend yields are smaller. They can be in tune of 1-2%, but capital appreciation is often in double digits. [Updated list is here] But does that make “dividend” less worthy? Not at all. What comes as a package with capital appreciation is price volatility and associated risk. Predicting capital appreciation is harder. But dividend income is more rational and predictable. In this article, I will explain what makes dividends so special, irrespective of their limitations.
High-Quality Dividend Paying Stocks
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Favor dividend investing for these 4 reasons:
- It’s Different: Dividend-focused investing is different. Investors who invest in them do it with a different objective. Their focus is regular income. Even if the yield is low, it’s ok for them. Read more about income investing.
- Visible: Things which are visible, are more predictable. Predictability gives a more sense of control. Likewise, compared to capital appreciation as dividends are more predictable, investors feel more in control.
- Foolproof: If the rules are applied properly, it will not be wrong to say that dividend-focused investing is almost foolproof. There are fewer chances that the investor will make a loss with them. Read more about foolproof investing rules.
- Pros Like it: Champion investors like Warren Buffett love dividend paying stocks. A high growth rate is a priority for the majority. But expert investors prefer a balanced portfolio. Read about Warren Buffett’s 3 rules.
How to generate dividend income?
Buy dividend paying stocks, and hold them for the long term. What is the point about the long term? A stock that is yielding 0.5% at the time of purchase, can yield much higher with the passage of time. How?
Let’s understand this with a real-life example.
Suppose a person bought shares of TCS in the year Mar’09. Details are as below:
- Share Price (2009): Rs.260/share (actual price before bonus shares).
- No of shares bought: 10 nos.
- The cost paid to buy TCS: Rs.2,600.
- Dividend paid in 2009: Rs.14/share.
- Total dividend income in 2009: Rs.140.
- Dividend yield in 2009: 5.38%.
Suppose this person held on to his shares till the year 2018. What will be his dividend yield as of Mar’18? [Note: Bonus shares 1:1 was also issued to all shareholders between Mar’09 & Mar’18]
- The cost paid to buy TCS: Rs.2,600.
- No. of shares held in 2018: 20 nos (1:1 bonus share)
- Dividend paid in 2018: Rs.50/share.
- Total dividend income in 2018: Rs.1,000
- Dividend yield in 2018: 38.4%.
Read more about the dividend analysis of TCS stocks here…
Please note how dividend yield improved from the year 2009 to 2018. The dividend yield in 2009 was 5.38% compared to 38.4% in 2018.
What is the point?
Just by holding on to “good stocks” for long term (say 10 years), their dividend yield itself will become high enough to beat the returns of any debt instrument.
Is it that easy? Buy dividend-paying stocks, hold for a long term, and that’s it? Yes, it is this easy. The only control point is, one must buy only “good stocks“.
Good Dividend Stocks…
Not all stocks that pay dividends are good. There are two criteria that makes a good dividend stock:
- Consistent dividend payout.
- Consistent growth in dividend paid.
This is why companies like TCS and HUL are a good dividend paying stock. They not only pay dividends regularly, but it also grows with time.
Do all companies pay growing-dividends to its shareholders? No. This is why identification of good dividend paying companies is not easy. How to do it? By digging into the financial reports.
How to identify them?
What are dividends? Dividends are nothing but a part of companies net profit. A company which make more profits, will pay higher dividends.
Dividend payment is a process by which companies share its net profit with its shareholders. Good company tend to increase its profits over time. As the profits grow, dividend payment by the company also increases.
This is hint which can be used to identify potential dividend stocks. Do the following:
- Step #1: Open the profit and loss account of the company.
- Step #2: Check if the EPS has grown in last 5 years.
- Step #3: Also check if dividend per share has grown in last 5 years.
- Step #4: Compare if EPS growth and dividend per share growth are similar.
[Read more about how to evaluate the financial health of a company]
If EPS and dividend per share growth are similar, it is a good sign. Why? Because of the following reasons:
- EPS growth means, company’s net profit is improving.
- Dividend per share growth mean, company believes in dividend philosophy.
- EPS growth similar to dividend growth means, as company profit will increase in future, its dividend payout will also improve.
Dividend stocks vs fixed deposits
Why I am comparing dividend stocks with fixed deposits? Because starting yield of dividend stocks are even lower than fixed deposits. So some might think that why to invest in dividend stocks?
Good dividend stocks offer two clear benefits to its investors:
- Short term income: Though starting yield of dividend stocks can be low, but it improves with time. Moreover, good stocks can yield very stable dividend income in short term.
- Long Term Gain: There are two types of gains in long term. First, dividend per share will improve hence its dividend yield will also go up. See TCS example shown above. Moreover, there will also price appreciation of these stocks with time.
Though fixed deposits can give fixed interest, it will never grow with time.
The initial yield of fixed deposits can be better than the dividend yield of stocks, but there are some disadvantages as well. Yield from yield reduces with time (lower interest rates). But the dividend yield of a good company will increase with time.
There are ‘hold forever’ stocks
The price of dividend stocks is very stable. Historically, the price of such stocks wavers less than other stocks. They have a lower beta. Do you know why?
Because people tend to continue to “hold on” to their dividend stocks for a longer period of time (sometimes like forever). Why? Because they continue to earn dividends no matter what. There is no need for them to sell their dividend stock holdings.
These stocks tend to yield dividends even during stocks market collapse.
How to plan dividend stocks purchase?
How to plan its purchase? By keeping a past record of companies which has paid decent dividends. These will be your list of the highest dividend paying stocks. (a ready-made list is provided above).
Which records are more important than others?
- Net Profit (PAT): This is the profit earned by the company after paying all its dues like adjusting for depreciation, interest, taxes etc. Read more about analysis of profit margin of companies.
- Dividend paid (D): Here we will have to compare two things. Out of the total PAT, how much lump-sum dividend the company has paid. Read more about dividend yield formula.
- Dividend Payout % (D / PAT): Dividend payout suggests, what portion of PAT was paid out as dividend to the shareholders. Record keeping of “dividend payout %” will give a good insight. Good companies try to mimic their past dividend payout ratio.
The above chart is showing a trend of dividend payout ratio for TCS and HUL. What is the trend?
HUL: If HUL will follow this trend, most likely it will give 80% of its PAT as a dividend to its shareholders in times to come.
So if we can extrapolate PAT of HUL for the next 3-5 years, we will approximately know what can be a potential “dividend income” out of HUL.
TCS: If TCS will follow this trend, most likely it will give 35% of its PAT as dividends to its shareholders in the next years.
How else to earn dividends?
In India, there are only a few avenues to earn dividends: stocks and dividend mutual funds.
In Europe and America, dividend-paying exchange-traded funds (ETF’s) are also available. At the moment India does not have such ETFs.
People can buy stocks using an online trading account. These days mutual funds can also be purchased using online trading platforms.
[Read more about REITs. They can also be a good source of dividend income]
Limitations of dividend…
If dividend-paying stocks are so good, why everyone does not only buy them? Enough of only good things about dividend stocks. Here are some limitations of dividend-focused investing. I feel, being aware of these limitations will further enhance the benefits of dividend-focused investing for the investors…
- High Dividend Yield is not reliable: Dividend yield is not a sufficient indicator to identify good dividend paying stocks. Stocks paying high dividend one year, and nothing the following year, is also not good. It may happen that a stock which is yielding 8% dividend today, may yield only 0.5% in next FY.
- Dividend is high but fundamentals are weak: Few years back Strides Pharma was yielding dividend close to 33% per annum. On Mar’14 it paid dividend of Rs.505 per share. On Mar’18 it paid dividend of only Rs.2 per share. Why it happened? Because EPS of this stock fell from Rs.593 (Mar’14) to Rs.99 (Mar’18).
People who bought this stock then, for dividend yield, must be feeling disappointed today.
Moral of the story: It is important to look at dividend yield, but in conjunction with other fundamentals like sales, profit, EPS, dividend payout %, etc.
Read more about value investing here…
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.
One can think it like this, ‘use the dividend income to buy more dividend stocks. Let this cycle continue for the next 10/15 years. This will be a great way of wealth generation.
It is said that Warren Buffett earns billions in dividends alone.
Set a personal target for yourselves. In the next five years, let your dividend income reach the Rs 5,000/month mark.