Dividends are payments that a company makes to its shareholders. Most companies set aside a portion of its profits for distribution as dividends, and retain the rest for re-investment. The dividend yield gives a measure of how much an investor is earning (per share) from the investment by way of total dividends. It is calculated by dividing the dividend announced by the share price, and then multiplied by 100. For example, a company ‘A’ with a share price of Rs 50 offers a dividend of 50 paise per share, the dividend yield is 1%.
Why buy dividend yield stocks: Many experts say that buying shares of high dividend yield companies is a good long-term strategy. It is valid in volatile times such as now, as stocks with high dividend yields offer a nice pay-off from your investment. They help you earn a steady income through dividend pay-outs. Such stocks (also called dog stocks) are considered safe and are a good option for risk-averse investors who fear a stock market crash. High dividends also indicate that the company’s management is sharing profits with investors. Such companies often do not use much cash for expansion, thus benefiting investors. However, investors need to also look at the consistency of dividend pay-outs. Public sector banks and companies offer a high dividend. Similarly, foreign multinationals in consumer and pharmaceutical space also offer a good dividend.
Tax benefit: The dividends declared by companies are tax-free in the hands of investors, whereas interest earned on bank fixed deposits is taxed, which makes investing in dividend-yield stocks a tax-efficient proposition.
Dividend stripping: Dividend-stripping is an investment strategy when investors buy shares of company ahead of its dividend declaration (the date is announced in advance), and selling after the dividend pay-out. This provides investors further tax benefits. Share prices of companies dip after the dividend pay-out. This really helps an individual to receive a tax-free dividend. The fall in the share price and selling thereafter means investors can book a capital loss. This can be set off against investment income and help reduce the net tax payable.
New index: NSE has also launched the CNX Dividend Opportunity Index comprising of 50 companies that are ranked by annual dividend yield. This can be monitored for exposure to high yielding companies listed on the NSE. It has provided 9.65 % returns in the last five years.
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