When investing in the stock market – offline and online investing – most investors tend to focus on earning money through price fluctuations in the market. The classic strategy is to buy low and sell high. The difference between the prices is how investors make a profit. However, there is another way you can earn money through stocks and that is through dividend investing.
What is Dividend Investing?
A dividend is essentially a portion of the company’s profit that it gives out to its shareholders on a discretionary basis. What this means is that companies are not obligated to pay dividends and not all of them do either. Even when companies pay, how much dividend they declare and whether annually or quarterly is also for them to decide.
But there are some companies that are known to pay high dividends consistently and many strategic investors make sure to add those stocks to their portfolio. This strategy of investing in high dividend-paying stocks to set up a regular source of income is called dividend investing.
What You Should Know About Dividend Investing?
- Dividend yield is a crucial metric to look at: The dividend yield is a financial ratio that tells you what percentage of the share price the company pays out as dividends every year. The dividend yield formula is: Annual dividends per share / Price per share. When online investing, make sure to look at the dividend yield in addition to the share price. It can help you assess whether a particular stock is suited for capital gains or for a steady flow of dividend income or both. For instance, BPCL share price as of 1st Feb 2022 is Rs 379.35 and its dividend yield is about 11.08%.
- Dividends are an indicator of financial health: Usually, it is companies that are financially stable and performing well that pay out dividends to their shareholders. However, there are some companies that, despite earning profits, choose to reinvest instead of declaring dividends for the growth and expansion of the business. Established companies that are industry leaders often pay regular dividends and adding them to your portfolio can add stability as well a steady stream of income through dividends.
- Relationship between share price and dividend yield: At first, it may seem counter intuitive but share price and dividend yield share an inverse relationship. This means as the price of a stock goes up, its dividend yield decreases.
Top Dividend Paying Stocks in India!
Here are some of the companies in India, that are known to pay regular dividends to their shareholders and have some of the highest dividend yields.
|Company||Dividend Yield %|
|Indian Oil Corporation Ltd||9.58|
|Power Finance Corporation Ltd||8.22|
While it is good to consider dividend investing, you should keep in mind that a high dividend yield should not be the only reason you invest in a particular stock. For instance, Coal India has one of the highest paying dividend yields but you also need to look at Coal India’s share price, net profits, overall financial health, etc., and see whether that aligns with your financial goals and risk tolerance.