Someone has rightly said: Earnings may be human, but dividends are divine. Did you know? Mukesh Ambani decided to forgo his salary for FY21. But, that wouldn’t matter as he earned a ‘Dividend Income’ of Rs. 1,988 crore, based on a dividend of Rs. 7 per share for FY21, or Rs. 5.45 crore daily!
For a moment, imagine that you own a cow. You fodder it and then milk it to earn income. Now, the demand for cows in the market seems to have grown and you decide to sell it at a profit. This is exactly how you make a profit in the stock market by selling a stock. On the other hand, the money that you get regularly by selling milk can be like a dividend. So, money paid regularly by a company to its shareholders out of its profits is known as dividend profits.
And dividend yield is a stock's annual dividends expressed as a percentage of the stock's current price. This number tells you what you can expect in future income from a stock based on the price you could buy it for today, assuming the dividend remains unchanged. If you own one share of stock that’s valued at Rs. 100, a 5% annual dividend yield means the company will pay Rs. 5 each year in dividend income.
In these volatile times, you may find yourself frustrated. Getting decent returns from stocks can be elusive. But there's no dearth of stocks these days with mouth-watering dividend yields. Some oil-marketing companies declared impressive dividends for FY21. Apart from a stellar rise in stock valuations as well as bumper IPOs, the year 2021, will be remembered for healthy payouts of dividends. Notably, companies such as Clariant Chemicals, Bharat Petroleum, Goodyear Tyre, and Rubber Co, PNB Gilts amongst others gave out hefty dividends.
Dividend income is one of the most desirable passive income sources. With interest rates hovering around 5%, people have a tough time looking for investments for steady returns like fixed deposits.
Dividend-paying stocks provide both passive income and stable growth to those uncomfortable with the volatility and risk that equities offer. Dividend income is a bit like earning interest from your savings account in a bank. However, it also depends on your investment style and risk appetite. Usually, aged investors or investors who are looking at annuity income tend to go more for dividend yield stocks. Younger investors may not choose such stocks as they prefer going for growth stocks. Many public sector banks and companies offer a high dividend. Similarly, multinationals in the consumer and pharma space also offer a good dividend.
On the flip side, the major disadvantage of paying dividends is the cash paid out to investors cannot be used to grow the business. You have to consider a multitude of other aspects while selecting dividend-paying stocks such as: How stable is the business? How are the cash flows? What are the prospects for the industry? How good is the management? What are the debt levels? And how fast can the earnings grow?
Dividends do not just offer regular income. When reinvested in well-run businesses, they can boost long-term investing returns with the magic of compounding.
However, the moral is: Though high dividend yield stocks may be a great starting place for a passive income source, never pick stocks on dividends alone. Because, remember that you're not looking for eggs, as much as you're looking for an egg-laying chicken.
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