What is Dividend Investing?: Hello, Being an investor or planning to invest in the stock market you would have come across many terms like a bonus, split, results, dividends, 200 days moving average, long term, blue-chip stock, merger, etc.
Confused!!! Even after planning to become a long-term investor you in a dilemma in deciding which factor to consider for investment.
Fundamental analysis for long term investment:-
It answers, what to buy /sell/Hold?
It focuses on value of stock.
Technical analysis for long term investment:-
Once you have decided what stock to buy, now technical analysis will answer, went to execute that trade?
A proper entry exit level and position sizing will be determined using technical analysis.
In this article, we are particularly focusing on long-term investment based upon dividend payout. Till the end of this article, you will understand
- Importance of dividends in the stock market and investing how
- Does long-term dividend investment suitable for you?
- How to find good dividend stocks or blue-chip stock?
- What is dividend yield?
- Advantage of buying the stock at an undervalued stage
- Dividend distribution tax/taxes on dividend income in India
- Dividend mutual fund
- What are the important dates for dividends in India?
- How to find upcoming dividend dates?
- How to outperform index, inflation, and overall market returns in long term?
We know, it ‘quite a long article but in comparison to your hard-earned money and your investment as a long-term investor this article will definitely be beneficial for your monetary gains. So first thing first!
What is Dividend Investing in the Stock Market?
Imagine you own 10 shares ( one share ₹100 )off C company. The total share where 100 worth rupees 10,000. So basically you are a 10% shareholder in C company. It performs its activities all around the year and makes a profit of rupees 5000 (after all pay-out) on investment of rupees 10,000 (i.e. total shareholding).
Now the management of the company has 2 options; it can reinvest the profit or share it with all the shareholders. Basically, a well-established company does not need much investment so they reinvest partial profit, and the rest is distributed among investors and called a dividend.
In short, dividend is actual amount of money that company shares with its all the shareholders.
What is a Dividend yield?
Carry forwarding our previous example of C company. Let’s, considered that company management has decided to share rupees 2500 profit with its shareholders, then
The dividend payout for each share= net dividend payout/total shareholder
In our case, it came out to be 2500/100=₹ 25 per share and
Dividend yield formula:-
=(dividend/share price) *100
Here, it is 25%
The return you gain while owning a stock due to a dividend is called a dividend yield.
- Importance of dividend yield in stock market and investing
| Your investment as | Returns you get |
| Land | Rent |
| Labour | Wages |
| Money market | Interest |
| Stock Market | Dividends |
As you can see, the only way to hold your position and create an income is only through dividends. While an increase in stock price is called a capital gain, it is unrealized that it can only be used after selling your positions. But dividend earning is recurring and it is the actual money that companies pay in your DP account. Being and long-term investor and still have a good quarterly, half-yearly or annual income is possible only through good dividend-paying stock.
The HNI and professional long-term investors are always in search of undervalued stocks. As it will create a consistent source of income for them.
Advantage of buying undervalued stocks
- It minimized your downside risk, hence attracting HNI who’s the main motto is preserving capital.
- Maximize upside capital gains. Attracting long term investors to grab the opportunity of making hefty profits
- Maximize growth of dividend income.
Does long-term dividend investment suitable for you?
It is suitable for people who:-
1. Want to ignore daily market noise
2. Desire growth of capital and income
3. Can recognize and appreciate good value
4. Have the courage to buy the stock at undervalue the price
5. Patience to hold
6. Wisdom to sell at overvalue.
How to Find Good Dividend Stocks
Main goal while investing is to:-
- Preserve your capital
- create source of income
- growth of capital and income
- To preserve your capital you can opt for time tested blue-chip stocks which are undervalued I.e. with high dividend yield concerning other stock and low stock price.
- To create it as your income source, the stock should have a historical dividend payout record consistently.
- finally, to grow your capital and income, both share price and dividend should increase continuously. For these, you can consider the stock with low depth, low pe ratio, and expected future earnings as dividends are paid out of earning.
- Real total return from dividend
=Capital gain +dividend gain + dividend growth
- capital gain -if the stock price of a C company increase is from 100 to 200 in 10 years it is 100% capital gain.
- Dividend gain- if C company give 10% dividend to shareholders that are 10 every year then at end of the 10th-year dividend gain is 100%
- Dividend growth -since C companies share price are increasing and it’s able to pay a dividend consistently means companies earnings are increasing so there will be an additional increase in dividend per year… say 20% every year on 10 fixed by seeing a company which comes out to be 62% in 10 years (compounded).
So real total return (on 100)= capital gain( 100)+dividend gain(100) + dividend growth (62)=262% in 10 years
- Tax on dividend income in India/ dividend distribution tax
Income through dividend is taxable as per applicable slab rate.
One also need to file ITR if he/she does not come in tax slab.
- Dividend mutual fund
Not only stock but some mutual funds also pay dividends. Such funds are mandatory to invest 65% in debt and 35% in equity as per SEBI norms.
Important Dividend Dates.
The basic and simple procedure followed by companies before giving dividend is:-
- Announce dividend (that is declaration date)
- The ex-dividend date (that is investor with shareholding on this date will get the dividend. Typically up to 30 days after declaration)
- Record date (that is all shareholder data is recorded on this day. Usually 2 days after the ex-dividend date).
- Payable date( date on which dividend is paid).
2. Interim dividend:- dividend paid in financial year
Final dividend:- dividend paid in the end of financial year
How to find upcoming dividend dates for NSE/BSE?
To find important date for dividend follow:-
www1.nseindia.com (Old NSE Website)
>Then click on Corporate
> corporate information> corporate action> purpose( dividend)
It will show you all the upcoming date related to dividend.
Also Read – How to Live off Dividends? How to Grow Your Dividend Income?
A final word for dividend investing
- A regular dividend growth helps to hedge against inflation
- A small seed sown today will give fruits in future
- Own stock with different dividend payout dates to get income throughout the year.
Hope you like this article. If you find out this helpful then share with your friends.
Happy Investing and Trading!