What Are Dividend Paying Stocks?

Profits, growth, returns – these are a few terms that come up while discussing stock market investments. However, one key area of earning from stocks which is not talked about a lot is dividends.

In this blog, we will discuss what dividend paying stocks are, their functioning and why they can be an intelligent option for diversification in a portfolio.

What Are Dividends?

Dividends are a portion of a company’s earnings which it decides to share with its shareholders. If you have purchased shares of a company and the company is making profits, it returns a part of this profit to you in cash or may give you additional shares. This is known as a dividend.

Every company does not pay dividends. Prominent companies that are well established and financially sound tend to pay dividends consistently.

What Are Dividend Paying Stocks?

Dividend paying stocks are shares of companies that pay dividends to their shareholders regularly. These shares are regarded as a point of reliable income especially for long-term investors.

How Do Dividends Work?

Now, suppose you own 100 shares of a company, and the company declares a dividend of ₹5 per share. You will earn:

• 100 shares x ₹5 = ₹500 dividend income.
• Dividends are generally declared by companies:
• Annually, once per year.
• Semi-annually, twice in a year.
• Quarterly, every three months.

Dividends declared annually or biannually tend to be larger compared to those declared quarterly. The performance of the company also affects the dividend amount.

Why Invest in Dividend Paying Stocks?

There are several notable reasons listed below:

Provides Regular Income

Consistent cash flow comes in the form of dividends. It is very helpful for retirees or individuals looking for passive income.

Lower Business Risk

Companies that pay dividends also tend to be more financially stable and stronger compared to businesses that do not issue dividends. This makes them less risky than small or unproven companies.

Long-Term Wealth Creation

Dividends can generate additional dividends, creating compounding wealth over time as opposed to waiting for appreciation of share prices.

Tax Benefits (Varies by Country)

In India, although dividends do get taxed, it is still a useful stream of income for small investors.

Examples of Popular Dividend Paying Stocks in India

• Infosys.
• Tata Consultancy Services (TCS).
• HDFC Bank.
• ITC Ltd.
• Coal India.
• ONGC.

Note: always do research or consult an expert before investing.

Things to Check Before Investing in Dividend Stocks

Dividend Yield – Shows the ratio of dividend paid compared to the company’s share price.

Dividend History: Review whether the organisation has offered dividends consistently over the years.

Payout Ratio: Indicates what portion of the profit is being distributed as dividend.

Company Fundamentals: The corporation should have robust earnings as well as a manageable debt level and favourable growth opportunities.

Concluding Remarks

Dividend stocks can enhance your investment portfolio, particularly when you desire consistent income streams alongside substantial appreciation over time. These stocks not only provide capital gains but also distribute dividends to shareholders.

Inclusion of a few quality dividend stocks into the portfolio would improve financial standing over a period, irrespective of the investment experience one has.