Are you looking for the best dividend stocks in India to generate passive income from stocks? Well, you are not alone. Many investors invest in dividend stocks of stable companies to build a stable portfolio, generate passive income and lower their investment risk.
Investing in dividend stocks is a proven strategy where investors can profit in two ways: firstly, regular income from dividend payments, and secondly the appreciation in the capital invested over time.
In this article let’s take a detailed look at:
What are dividend stocks?
What are the different terminologies associated with dividend stocks?
Why dividends matter?
The best dividend stocks in India
Why one should invest in dividend stocks?
What are dividend stocks?
Dividend stocks are stocks of well-established companies that reward their shareholders with regular dividends. Such dividend stocks usually have a consistent track record of distributing earnings back to shareholders in the form of dividends. Dividends can be in form of cash dividends or stock dividends are usually paid from profit once after meeting expenses.
What are the different terminologies associated with dividend stocks?
Dividend yield:
A dividend yield, expressed in terms of percentage, is defined as a financial ratio that shows how much a company pays out in dividends annually relative to its stock price.
How to calculate dividend yield?
Dividend yield can be calculated by dividing the dividend per share by the share price and multiplying it with 100
Let’s understand dividend yield with an example:
If the current share price of a company is Rs. 1000 and it declares a dividend of Rs. 100 for the year, then its dividend yield with be 10%.
What Is a Dividend Payout Ratio?
The dividend payout ratio is defined as the ratio of the total amount of dividends paid by the company to its shareholders relative to its net. Expressed in percentage, it is a measure of the proportion of earnings paid to shareholders in dividends.
It is an indicator of how much money a company is using for rewarding its shareholders as compared to how much money it is retaining for expansion of capacity or debt reduction or increasing its cash reserves.
Why dividends matter?
An investor who buys shares of a company and holds it for a long term, actual money is earned only when he sells the stocks. On the other hand, if the same investor invests in dividend stocks then besides the capital appreciation over the long term, he is also getting some regular income from his investments in the form of dividends.
Check out the list of top 10 dividend stocks on NSE below:
|
Company Name |
Last Price |
Latest Div % |
Dividend Yield % at these prices | ||
|
52 High |
52 Low |
Current | |||
|
Cox & Kings |
1.25 |
20.00 |
50.00 |
250.00 |
80.00 |
|
Weizmann |
42.15 |
100.00 |
14.52 |
65.15 |
23.72 |
|
Manaksia |
51.35 |
525.00 |
16.20 |
39.33 |
20.45 |
|
UFO Moviez |
76.90 |
150.00 |
14.42 |
25.82 |
19.51 |
|
Indiabulls Hsg |
213.85 |
1,550.00 |
11.78 |
38.27 |
14.50 |
|
ILandFS |
4.20 |
30.00 |
10.43 |
35.29 |
14.29 |
|
NLC India |
50.20 |
70.60 |
11.81 |
20.20 |
14.06 |
|
Banco Products |
143.40 |
1,000.00 |
11.44 |
36.97 |
13.95 |
|
MPS |
458.45 |
500.00 |
9.14 |
32.47 |
10.91 |
|
DB Corp |
92.50 |
100.00 |
9.53 |
17.24 |
10.81 |
Source: Moneycontrol.com
Now before you rush to invest in these top dividend stocks, it is very important to understand there is a clear distinction between top dividend stocks and best dividend stocks. So, while the companies listed above in the table may be the highest dividend-paying stocks currently on NSE, they may not be necessarily the best dividend stocks.
Why all top dividend stocks may not be the best dividend stocks to invest in?
Many investors make the mistake of assuming that high dividend paying stocks are safe to invest. When a company is paying high dividends to investors without reinvesting a signifcant portion of its earnings in the growth or expansion of the company it is also an indicator that the management of the company lacks confidence in scalability of the business.
Pointers to keep in mind while looking for the best dividend stocks to buy:
Avoid investing in companies with high debts
Some companies issue high dividends to rewards their shareholders even if the company is reeling under high debts. It is highly advisable to avoid investing in companies with high debts for dividends as indicates a sure recipe for disaster.
Avoid companies with inconsistency in dividend payouts
Before investing in and dividend stock, one should look at its history of payouts apart from the current dividend payout. In case there is no growth and consistency in dividend payouts over the long term it is best to avoid such stocks.
Look for payout ratio
It can be calculated as Dividends per Share (DPS) Earnings per Share (EPS). As a thumb rule, the payout ratio should not be too high. Moreover, be cautionary if the payout ratio is greater than 70%.
Check if the dividend payout ratio is sustainable
Before investing in a dividend stock, it is important to check what percentage of its earnings is the company paying a dividend. Is the dividend payout ratio too high and sustainable in the long run? For a better understanding, an investor can also check the dividend payout ratio of other companies in the industry.
Check the Price to Earnings (P/E) ratio of the company
By checking the (P/E) ratio of the company, an investor can determine if the stock is undervalued or overvalued. This way the investor will better placed to analyze the dividend yield of the stock.
Key takeaways
Investing in the best dividend stocks can be a great way to build a stable investment portfolio as well as generate passive income. Finding such stocks does require some hard work and a lot of analysis. Before investing in any dividend stock, an investor should thoroughly analyze its financial strengths, future growth prospects, management pedigree, and competition in the market. Most importantly rather than investing in a stock just for dividend, an investor should properly evaluate whether the company is worth investing in for the long term as capital appreciation also matters a lot.
Read more: How Long-term investing helps create life-changing wealth – TOI.