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Introduction
It is an investment strategy that aims at providing relatively consistent and regular returns and at the same time creating long-term value through careful choice of the stocks of those companies that pay dividends to shareholders irrespective of the existing conditions. In strikingly easy terms, we will define what dividends are, their advantages and drawbacks, and provide you with several reasons for the growth of dividends in India.
Understanding Dividends
Dividends can be described as ‘Rewards’ that a firm makes to its shareholders. If you own a particular kind of stock in a given organization you are said to be a shareholder and the organization may then choose to distribute part of its profits to you. It is this distribution of profits we refer to as dividends. It is quite an awesome way of earning money without your share.
Normally, companies declare dividends payable regularly, like quarterly or yearly. The amount of dividends may differ depending upon the financial and dividend policy of the company. For example, if a company pays a Rs 5 dividend per share and you have 100 shares, you get Rs 500 as a dividend.
> Dividend advantages
Income stability: Dividend income is constant. If you are looking for a source of regular income, then dividend stocks can provide just that.
Low-risk firms: It is a common observation that those who declare dividends are usually very strong firms having a very sound capital base. They are less unstable, and therefore, they are comparatively safer for the investor who is not so adventurous or lacks the endurance for risk.
Long-term wealth creation: One can harness dividends for the generation of wealth by re-investment. This is using the dividend payments for the purchase of more shares, which can lead to substantial wealth over the long term.
Tax Benefits: As I said earlier, in India, dividends are tax-free up to a certain limit in the hands of shareholders. Hence, this investment in shares against other investments is a tax-free option.
Variety: Classifications from a wide array of industries. Apart from that, you can have a diversified portfolio by investing in various companies with dividend yields to spread the risk.
> Dividend Investment Risk
Dividend reduction: Companies may reduce or eliminate the dividend payment in bad times. This reduction in the dividend can lead to a loss for the investors who rely on the dividends.
Market risk: Though comparatively volatile, dividend stocks are not entirely free from risk. The prices of the stock still fluctuate, leading to big potential losses.
Risk of Inflation: Your dividend income buying power is eroded over some time by inflation. Ensure that your dividends at least match or are more than inflation.
Sector-specific risks: Some sectors could be more prone to economic downturns or regulatory changes. This risk can be reduced by diversifying your portfolio across sectors.
> How to start investing dividends in Indian stock markets
Analysis and Selection: Start investing with the analysis of companies having a proven record of dividend payment. Look for established companies with robust financial health. Banking, pharma, consumer goods and services are some of the key sectors that one should consider while investing in.
Dividend Yield: This is a major determinant for the share investors. It is expressed by dividing the annual dividend per share by the value of the investment. A higher yield pertains to more money but beware of very high yields since this could also be an indication of economic hardship.
Dividend payout ratio: This is the earnings of the company about the dividends. The lower the dividend payment, the more the company retains earnings for growth. A high number indicates a larger portion of the earnings is used to pay dividends; a lower number means the company retains more for its operations.
Dividend History: The history of dividends by the business. Businesses that have a record of continuous dividend payments and increasing dividend rates are generally very good and very reliable investment choices.
Diversification: Do not put all your eggs in one basket or even a few savings accounts. Spread the portfolio across several industries to diversify your risk. Mutual funds and ETFs are one of the easiest ways to do so.
Reinvest: Consider taking your dividends and reinvesting them in the same stock or other investments. This could be a very powerful effect, indeed, which enormously magnifies your wealth over the years.
Monitoring: Keep a close eye on your portfolio and those of the companies in which you have invested money. If the financial health of a company declines sharply, that could be a time to reassess your investment.
Taxes: Tax treatment can make a big difference to your earnings on dividend income. In India, individual investors are tax-free, but only up to a certain limit. However, one needs to be on an updated line on tax laws.
> Rising Dividend Stocks in Indian Market
Few shares are available for the high dividend in the Indian Market. A few shares are mentioned below.
Hindustan Unilever Limited: HUL is the dominant producer of consumer goods in India and has many products like Dove and Surf Excel. For quite some time, it has been giving a regular history of decent dividends.
Tata Consultancy Services: TCS is one of the largest service producers in IT from India. It pays out regular dividends, with a strong history of the same.
Infosys: Another leading IT company that is found to pay wide dividends. The company has built a reputation for giving consistent returns to its shareholders.
Reliance Industries: The group, under the leadership of Mukesh Ambani, actually built a record of making very high amounts of dividend payouts for its shareholders.
ICICI Bank: It is an investment bank that pays out very reliable dividends and holds a fair amount of share in the Indian market.
Nestle India: With brands like Nestle, Maggi, and Nescafe, it represents the first FMCG company in history to have paid dividends.
Bajaj Auto: The makers of two-wheelers have an excellent record of the payment of dividends and are one of the critical players in the automobile industry.
Power Grid Corporation of India: A government corporation with majority shareholding that has been consistent and stable.
It involves steady income, security, and long-term accumulation of wealth from Indian stocks—a strategy most suited for conservative investors and those who desire a source of income with capital appreciation.
Research companies that pay reliable dividends, diversify your portfolios and then reinvest to create reliable sources of businesses for constant income to achieve long-term financial goals. However, be aware of the risks and monitor regularly that your investments are aligned with your goals.
The right approach makes equity dividends an excellent addition to your investment journey in the Indian stock market. This provides a benefit for well-established companies with the ease of generating regular income.
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