Dividend stocks provide a regular dividend as a part of their profits. Therefore, dividend investing is a profitable investing strategy if managed properly.
Are you interested to learn how to invest in dividend stocks in a proper way? In this post, I am going to present the dividend investing strategy.
Dividend Stocks Meaning
Before investing in dividend stocks, you should know the definition of dividend stocks.
The stocks listed in a stock market may pay a fraction of their profits to the shareholders on a regular basis. Therefore, the stocks which pay regular dividends to their shareholders are known as dividend stocks.
The dividends received from stocks allow the shareholders to build long-term wealth.
In addition to the final dividends, the dividend stocks may pay special dividends or interim dividends to their shareholders.
A stock with a payout ratio of 50% means that it pays 50% of its profits to its shareholders as cash dividends. The remaining money (50%) is reinvested in the business such as expanding the business, launching a new product, and lowering the short-term debt.
What is Dividend Investing in Stocks?
Dividend investing is a method of investing in stocks that pay regular dividends. Dividends obtained from stocks on a regular basis can be a source of income for investors for decades. The solid and growing companies provide dividends to shareholders of the company at regular intervals in a year.
Therefore, dividend investing has been a well-liked investment strategy for investors for decades. However, many people think that it is hard to research and identify what companies to invest in.
Dividend Investing Example
Consider one example of dividend investing.
Suppose a person Patro holds 100 shares of an automobile stock Bajaj Auto. The company Bajaj Auto paid an interim dividend of INR 120 per share on 03-03-2020. Therefore, Patro receives INR 12000 as dividends.
Now Patro wants to buy more stocks of Bajaj Auto because he realises that the company Bajaj Auto pays good dividends over a long period of time.
If he had invested in Bajaj Auto (100 shares) since January 2015 and holds the stock, he would have received a large amount of money through dividends.
Now Patro writes down how much dividend money he has received since January 2015 by investing in Bajaj Auto (100 shares) and holding the stock.
In the year 2015, he received = INR 50 x 100 = INR 5000 (INR 50 per share as a final dividend)
In the year 2016, he received = INR 50 x 100 = 5000 (INR 50 per share as an interim dividend)
Again, in the year 2016, he received = INR 5 x 100 = 500 (INR 5 per share as a final dividend)
Therefore, in the year 2016, the total dividend money he received = INR 5000 + INR 500 = INR 5500
In the year 2017, he received = INR 55 x 100 = INR 5500 (INR 55 per share as a final dividend)
In the year 2018, he received = INR 60 x 100 = INR 6000 (INR 60 per share as a final dividend)
In the year 2019, he received = INR 60 x 100 = INR 6000 (INR 60 per share as a final dividend)
In the year 2020, he received = INR 120 x 100 = 12000 (INR 120 per share as an interim dividend)
A total of INR 40,000 he has received till now from dividend payments by Bajaj Auto stock.
What a large amount of money received from dividends!
Therefore, dividend investors invest in dividend stocks for the sake of dividends.
High Dividend Yield Stocks
Dividend payments are also expressed in dividend yield. The dividend yield is defined as the ratio of the annual dividend per share to the current share price.
Dividend yield = Annual dividend per share / Current share price
It is expressed in percentage (as a percentage of current market price).
Dividend yield (%) = (Annual dividend per share / Current share price) x 100
A higher dividend yield ratio would mean that more amounts of profits are given to shareholders as dividends, and fewer amounts of profits are being reinvested in the company.
The dividend yield ratio is dynamic in nature, as the market price fluctuates in every second.
Therefore, high dividend yield stocks pay higher dividends to their shareholders.
Top Dividend Stocks of NSE-BSE
The followings are the top dividend stocks of NSE-BSE.
- Bajaj Auto: An automobile company – An interim dividend INR 120 per share (dividend yield = 1200%) on 03-03-2020
- Tech Mahindra: An IT company – An interim dividend INR 10 per share (dividend yield = 200%) on 02-03-2020 – A final dividend INR 5 per share (dividend yield = 100%) on 23-07-2020 – A special dividend INR 15 per share (dividend yield = 300%) on 29-10-2020
- ITC: An FMCG company – A final dividend INR 10.15 per share (dividend yield = 1015%) on 06-07-2020
- Gail: An energy company – An interim dividend INR 6.4 per share (dividend yield = 64%) on 17-02-2020
- Power Grid Corporation: An energy company – An interim dividend INR 5.96 per share (dividend yield = 59.6%) on 16-03-2020 – A final dividend INR 4.04 per share (dividend yield = 40.4%) on 02-09-2020
How to Invest in Dividend Stocks?
How to invest in dividend stocks? This is the common question asked by several people all over the world.
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Dividend Investing Strategy
The strategy involved in dividend investing is a simple one. You should follow some principles.
First, you should look for stocks that give regular dividends. If the dividend yield is high, it is better.
Then you check for the upcoming dividend of the stocks. Consider the stocks that are going to give dividends in the next 30 days. If the dividends have been increasing year-by-year for the last 5 years, the stock is a good one for dividend investing. An upcoming dividend stock gives dividends at an early stage. Therefore, this could be an additional benefit.
Then, you should check the stock quality. It is mandatory that the stock quality should be good. Quality stock is ideal for long-term investment.
After knowing the upcoming dividends of stocks and confirmed the stock quality, you should calculate the intrinsic value of the stock. If the intrinsic value of the stock (the upcoming dividend stock) is at least 25% higher than the current price of the stock, you may consider for the dividend investing.
It is also noticed that the stock price falls after paying a dividend. However, if the stock quality is good and the stock intrinsic value is higher, this will not affect much. After a few days, the stock price will move upwards.
The lesson to remember:
An upcoming dividend stock with good quality and higher stock intrinsic value is a perfect candidate for the dividend investing.
When to Sell the Dividend Stocks?
Once you have purchased a dividend stock, you should plan it for the long term. As a thumb rule, you should keep it holding for at least 3 years. As long as the stock quality is maintained, you should not worry.
You remember one thing:
High-quality dividend stocks will never be sold.
However, if you want to sell for any reason, be sure that the current market price of the stock is at least 25% higher than the intrinsic value of the stock.
If done in a proper way, dividend investing gives better returns in the stock investment process. You should follow the below principles.
- Find out the upcoming dividend stocks.
- Check the quality of the stock. The stock quality should be good for long-term investment.
- The stock intrinsic value (also known as the fair value of the stock) should be at least 25% higher than the current market price of the stock.
You can use the upcoming dividends of NSE-BSE stocks for proper dividend investing.
You can use my free online stock intrinsic value calculator (given in the below link) to find out whether a stock is suitable for value investing or not.
The above calculator is a good one for NSE-BSE stocks (suitable for Indian stock market). I have tested it. Other country people use the calculator and express your views.
Whenever you want to reinvest funds in dividend stocks, follow the above three principles to get better returns.
If you any queries or suggestions regarding the post, feel free to comment.
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Disclaimer: The views expressed in the present post are that of the author and not for any suggestion to buy or sell stocks. Investments in the stock market are subject to market risks. Hence, do your own research on a specific stock or consult your financial adviser before investing.