How do dividend stocks work?
A stock dividend is a distribution to shareholders in the form of additional company shares rather than cash. Unlike cash dividends, stock dividends are not taxed until the recipient sells the shares. Similar to a stock split, issuing stock dividends increases the number of outstanding shares, which can lead to a decrease in the share price. However, this does not impact the overall value of the company. Businesses may choose to issue stock dividends instead of cash payouts to retain cash reserves while still rewarding shareholders.
Factors to consider before investing in dividend-paying stocks
Choosing quality dividend stocks involves analysing financial health, dividend consistency, earnings growth, and the company’s long-term payout sustainability.
1. Dividend payout ratio
The dividend payout ratio is the percentage of a company’s total earnings distributed among its shareholders as dividends. For example, if a company earns Rs. 100 crore and distributes Rs. 20 crore as dividends, the dividend payout ratio would be 20%.
2. Dividend yield
The dividend yield compares a company’s annual and total dividend payout with its current stock price. Most experienced investors look for stocks with a dividend yield of 3-4% without it being higher, which indicates potential dividend cuts in the future.
3. Dividend coverage ratio
The dividend coverage ratio depicts the number of times a company can pay dividends to the shareholders using its net income for a specific period. If a company has a high dividend coverage ratio, it may give regular dividends to the shareholders.
Read More: Know more about National Stock Exchange
Strategies to invest in dividend stocks
Dividend-paying stocks in India offer investors regular income, but choosing the right ones requires evaluating factors like payout history, financial strength, dividend yield, and long-term growth potential.
1. Seeking long-term profitability
Companies may have different financial health during different quarters. In one, they may earn significant profits, while in others, they may incur losses. Hence, it is important to identify stocks that can offer long-term profitability, as they have a higher chance of offering regular dividends.
2. Avoiding heavily indebted companies
Almost all companies have debt as they borrow funds to expand their business. However, companies with high amounts of debt have to use a significant portion of their earnings for repayment, leaving lower or no profits to be distributed as dividends. Hence, you should avoid dividend stocks of companies with heavy debt.
3. Checking sector trends
Trending dividend-paying stocks in India follow market trends, such as bearish, bullish, and sector-based trends. These trends heavily affect companies' business operations and, ultimately, their profits. Hence, you should look at market trends before investing in stocks to earn dividends.
4. Dividend yield
Dividend yield is an important factor in analysing upcoming dividend stocks in India. Although a higher dividend yield is always better, it should be balanced. A dividend yield of around 3-4% depicts a higher possibility of dividend payments. However, stocks with higher-than-usual dividend yields are not considered good as they may indicate potential future dividend cuts.
5. The ratio of the earning growth and payout
Before analysing and choosing the trending dividend-paying stocks in India, it is important to look at the company’s ratio of the earning growth and payout. The ratio indicates that the company has enough income to provide good dividends to the shareholders.
6. Consistent dividend history
You should look at the company's historical dividend performance. If the company has announced regular dividends in the past, there are higher chances of regular future dividend payouts.
Begin your investing journey: Demat account opening now!
Conclusion
Companies offer dividends to their shareholders to ensure they do not sell the shares and continue being shareholders. It is also offered as a reward to the shareholders for their continued trust in the company. However, for investors looking to park their capital in such stocks and earn a steady income, it is crucial to analyse various trending dividend-paying stocks in India to ensure they invest in the most suitable ones.
Check some of the popular stocks today
