One of the key learnings from the very famous book ‘Rich Dad Poor Dad’ by Robert Kiyosaki emphasizes creating assets that generate passive income. .You must start creating passive sources of income along with working in a J.O.B. (Just Over Broke) setup. Investing in assets, starting new businesses, and creating assets where you work once and get paid over and over again.
Dividends are one of the best sources of passive income!
Before we dive deeper into dividend aristocrats and benefits thereabouts, let us understand the basics first.
What are dividends?
Dividends are rewards the company gives its shareholders as a distributed share of profit. However, not all companies pay regular dividends. Most of us, investors, generally value dividend income from stocks as a great choice for regular passive income.
What are Dividend Aristocrats?
Dividend aristocrats are established market contenders that have a robust history of sharing profits with shareholders, sturdy cash flows, and steady earnings profile. Furthermore, companies that have managed to increase their dividend payouts year on year, consecutively for the 25 years, are also known as Dividend Aristocrats.
These stocks have become favorites of investors focused on income generating assets. Most of these companies tend to be large in scale with a history of super-growth years in the past. They are also recession-proof stocks that can help you to sail through with regular cashflow when the tide is against you.
Before we move on to understand the benefits of dividend-paying stocks, you must understand frequently used jargon around dividends.
- Ex-Dividend Date: You should own the stock by the ex-dividend date to be eligible to receive the dividend. If you purchase the stock after the ex-dividend date, you will not be entitled to receive the dividend. However, if you sell the stock after the ex-dividend date, you are still entitled to get the dividends as you were a shareholder in the books as on the ex-dividend date.
- Dividend Yield: It is one of the most important metrices to evaluate the dividend in comparison to stock’s market price. The mathematical formula is the company’s annual dividend is divided by the stock price.
- Dividend Payout: The dividend payout is a percentage of dividend based on the face value of the stock. The company announces dividend typically as a percentage of face value and hence, it’s a very common metric and used in the general parlance
Benefits Of Investing In Dividend Aristocrat
- Sustainable And Profitable Companies
Dividend aristocrats have paid dividends for the last 25 years at an increasing payout rate; no reason to worry about the profitability and sustainability of the company. A company declares a dividend payout only when the company has delivered profits. Delivering profits for the last 25 years surely is a sign of the strength and competence of the business. Investors tend to feel secure investing in such companies.
- Stable Returns For The Investor
There are two ways for you to earn returns from the stock market. The capital appreciation of the stock and the dividend income a company declares. The stock price may be a factor in several external factors including Covid-19, global wars, oil prices, inflation, etc. You may make a (notional) loss in a particular year if the stock prices plummet temporarily because of any such factor. However, dividend income is purely based on the actual business performance of the company. So, they seem to be more stable and consistent irrespective of the stock price movements. The dividend is a true indicator of the company’s actual business performance.
For example, companies like NMDC, Hindustan Zinc, etc. have a history of double-digit dividend yields in addition to actual stock performance. These stocks shall surely give some comfort to you, as an investor, because of a stable income flow.
- Good Source Of Passive Income
Dividend happens to be one of the finest sources of passive income. If you are nearing your retirement or making a full-proof retirement plan, build your portfolio including such dividend aristocrats that offer regular cash flow at the time of retirement. As these companies have been in operation for more than a few decades at least, it may be easier for you to sleep peacefully after retirement once you have identified these stocks. Business performance is hardly a question for such companies so, your portfolio may not need frequent reviews.
These companies have shown their strength and standing in the stock market through their performance over the last many years.
How Do You Identify Such Dividend Stocks?
You must consider investing in businesses capable of generating a continuous stream of dividend income, with a possibility of increasing the payout as they grow in the future. Here are a few important pointers to consider:
- Large, blue-chip companies with regular positive cash flow and profit history
- Companies that have a strong history of paying regular uninterrupted dividends year on year
- Companies that have consistently increased their dividend payouts
However, a good dividend can never be the only reason to invest in a company. The longevity of that dividend and the health of the share price are purely dependent on the actual business opportunity for the company in the future.
To summarize, one can think of it like this, ‘use the dividend cashflow’ to purchase more units of “dividend-paying stocks. Let this cycle continue for the next 10 to 15 years. This will be one of the greatest ways of wealth creation. Today, the veteran investor, Mr. Warren Buffet earns millions only from dividends every year.
Disclaimer: Information mentioned in this email is for educational purposes. Please do not consider it a recommendation to buy/sell/hold from Research & Ranking.
Read more: How Long-term investing helps create life-changing wealth – TOI.