Personal Finance

Investing in dividend-paying companies3 min read

January 18, 2021 2 min read

Investing in dividend-paying companies3 min read

Reading Time: 2 minutes

When you buy a stock or share of a company you become a part-owner and are also entitled to a share in its profits. When a listed company shares its profits with shareholders, this payout is termed as a dividend.

Most stock market investors have a clear goal of investing which is dividend income. However, listed companies are not bound to pay dividends, therefore, as investors, we have to shortlist companies that pay dividends regularly.

When listing out such companies we look at historic trends and determine whether a particular company pays regular dividends and what is the proportion of the same.

Why Dividend-Focused Investing

Investors who have a low-risk profile or are risk-averse may look at investing in high dividend-yielding stocks, which not only gives them regular income but also safety from major share price fluctuations.

Also, investing with an expectation of capital appreciation brings along higher risk because investors cannot be certain of stock price increase over a certain period, but dividend income is more predictable.

How to Select High Dividend-Yielding Stocks

Investors may look at companies that not only pay regular dividends but it also grows every year.

A dividend is something that companies payout of their net profit, therefore as net profit grows so does the dividend.

So, investors can look at a company’s profit and loss accounts and see if the profits are growing along with the dividend. If a company’s profit is growing and also its dividend then the company’s dividends are likely to increase gradually.

There are some terminologies which you will often hear when it comes to dividend, lets see what they mean.

What is the Dividend Yield, Dividend Ratio, and Payout Ratio

Dividend yield is the company’s annual cash dividend per share divided by its current stock price.

Dividend ratio means the ratio of annual dividend paid to shareholders to the face value of the stock.

The payout ratio is earnings paid out as dividends to shareholders divided by the total earnings of the company in that year.

FYI: Be cautious if a company’s payout ratio is high because it may mean that the company is not investing its profits in growth.

Here is a List of Few Stocks that Pay High Dividends

Hindustan Petroleum Corp (HPCL)

Average dividend – Rs. 24

Average dividend payout (in percentage) – 38%

Power Grid

Average dividend – Rs. 4

Average dividend payout (in percentage) – 31%

Power Finance Corp

Average dividend – Rs. 9

Average dividend payout (in percentage) – 33%

Tata Steel

Average dividend – Rs. 10

Average dividend payout (in percentage) – 48%

Infosys

Average dividend – Rs. 35

Average dividend payout (in percentage) – 51%

NTPC

Average dividend – Rs. 4

Average dividend payout (in percentage) – 36%

BPCL

Average dividend – Rs. 25

Average dividend payout (in percentage) – 39%

National Aluminium Co (NALCO)

Average dividend – Rs. 4

Average dividend payout (in percentage) – 63%

Conclusion

Investors looking for a steady income and who are less risk-averse should invest in a stock paying a high dividend rather than investing with the hope of capital appreciation.