What Is a Dividend and How Do They Work

STOCK MARKET

Every year after the third quarter results, around mid-February investors look forward to the annual results of the companies in which they hold shares.

Big companies pay dividends after the annual results. Some companies pay twice a year and some pay thrice a year, but the one paid at the end of the year is by far the biggest amount.

Most profit-making companies pay dividends when they announce their annual results.

It’s no wonder investors keenly anticipate big fat payouts from high dividend payout stocks in India. During AGMs, unsatisfied investors complaining about, ‘the low dividend this year’, is a common sight.

It’s not too much of a stretch to say that the annual or ‘final’ dividend is a touchy subject for many investors who have grown accustomed to receiving generous payouts year after year.

Why Invest in Dividend Stocks?

Dividend-paying stocks help to keep conservative investors' portfolios steady. This increases investors' confidence in these stocks. And as a result, more money is invested in the market. Investors have discovered that the steadiness of stocks that pay dividends is very enticing. This is particularly valid in a volatile market. While the majority of companies are in decline, some stocks nonetheless provide a moderate return on investment.

This is not to argue that dividend stocks do not experience market declines. Naturally, they do. However numerous academic types of research and a wealth of anecdotal evidence have demonstrated that these equities typically decline at a slower rate than the market. When the sentiments of investors are down, these stocks perform better than others.

Another reason for preferring dividend-paying stocks is that there is pressure on the Company to perform better year on year so that they can pay better dividends next year. This provides an incentive for companies to increase their earnings so that they can pay an even higher dividend next year. This is why dividend-paying stocks have been shown to deliver higher returns than non-dividend-paying stocks over long periods of time. Thus, investors prefer to invest in dividend-paying stocks.

The father of value investing, Benjamin Graham states that:

‘The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.’

Biggest Dividend Paying Stocks

With the interest in dividend-paying stocks growing up, it is natural that investors will want to find out which stocks which fall in this category.

The characteristics we are looking:

  • The companies that pay a significant share of their profits as dividends.
  • The companies that will see a big jump in profits this year.

Look for stocks that have the following characteristics:

  • A strong dividend-paying track record.
  • Moderate to high dividend payout ratio.
  • Growth in profits i.e., earnings per share (EPS).

We anticipate the stocks chosen with this criterion in mind to distribute a sizable final dividend when they announce their annual results in a few months.

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