Last Updated on May 25, 2022 by Neera Bhardwaj
Investing in the stock market can give you two types of returns. The first is the capital appreciation that you get when the value of the stock rises. The second is the dividend income that comes from dividends that many companies issue as a kind of reward to shareholders from the profits the company makes.
Dividends can create an additional source of income and give you liquid funds if you don’t want to redeem your stockholding. But, how do you pick stocks of companies that give out dividends? How can you establish an alternate source of income from dividends?
Let’s find out!
Table of Contents
What are dividends?
When a listed company makes a profit in a financial year, it has the following three options:
- It can retain the entire profit and use it within the business for expansion, growth, or for meeting the cash flow requirements.
- It can distribute the entire profit among its shareholders.
- It can retain a part of the profit for business use and distribute the remaining among its shareholders.
In the second and the third case, the profit distributed by the company, fully or partly, is paid in the form of dividends.
So, dividends are the part of the profit that shareholders earn on their shares for being part owners of the company. Dividends can be paid in cash, stock, or other forms. Companies declare dividends at their board meetings, and the shareholders’ approval is a must for dividend declaration.
How to earn dividends?
When you invest in the stock of dividend-yielding companies, i.e., companies paying dividends regularly, you automatically become eligible to receive the dividends announced by the company. The amount you get is generally pegged to the number of shares you hold.
The dividend yield is a commonly used parameter when finding profitable and dividend-yielding companies in the stock market. Do you know what dividend yield is?
Dividend yield – the concept and its calculation
The dividend yield is a ratio that measures the dividend that a company pays, vis-à-vis its share price. The formula is expressed in percentage, and the higher the dividend yield percentage, the better is the company’s dividend-paying policy.
Dividend yield = (Dividend per share/market price per share) * 100
For example, say, a stock valued at Rs. 150 per unit pays a dividend of Rs. 10. Then, the dividend yield of the company would be:
(Rs. 10/Rs. 150) * 100 = 6.67%
Investing in dividend-yielding stocks
If you want to get regular dividend incomes from your investments, besides capital growth, you should look to invest in stocks with a high dividend yield.
How do you find such stocks?
Through tickertape’s Stock Screener, how else!
tickertape offers an online Stock Screener that helps you find the stocks that you are looking for. If you want dividend-yielding stocks, you can select the relevant filters on tickertape’s Stock Screener and get a list of the best dividend-yielding stocks. The process is quick, simple, and gives you accurate results.
How to use tickertape’s Stock Screener to find dividend-yielding stocks?
You just need a computer or a smartphone and an active internet connection to use tickertape’s Stock Screener and find the best dividend-yielding stocks. The process is as follows:
- Visit tickertape’s Stock Screener.
- In the filters panel on the left hand side of the screen, choose ‘+ Add Filter‘ and go to ‘Valuation.’
- In the ‘Valuation’ filter, you would find different options. Choose ‘Dividend Yield’ and click on ‘Done.’
- Then, set the dividend yield filter to ‘High,’ and you would get a list of stocks with the highest dividend yield.
- You can compare the stocks and choose those that have the potential to offer high dividends on your investments.
Customising your search for dividend stocks
If you want to further narrow down dividend stocks based on other parameters such as market capitalisation, the index they belong to, sector, and more, simply choose relevant filters from those available in the panel and you are all set. For instance, if you need to find large-cap or mid-cap companies with a high dividend yield, you can change the market capitalisation and find relevant stocks. Some of the common filters include:
- Market capitalisation – large-cap, midcap, and small-cap stocks
- Index – Nifty 50, Nifty 100, and the like
- Sectors – pharma, banking, energy, healthcare, and the like
- P/E ratio
- Debt to equity ratio
- Profitability of the stocks
- Technical indicators
Benefits and risks of high dividend-yielding stocks
Dividend-yielding stocks have both pros and cons. Have a look:
Benefits of stocks yielding high dividends:
- It is a good indication of a company’s financial stability. A company with a soundtrack of dividend payment has sufficient profitability. It also shows that the company is sustainable, and its stock can give good returns over time.
- Dividend-paying companies usually enjoy goodwill in the market and are established. As such, their stocks have lower short-term volatilities compared to companies with limited profitability.
- Dividend income creates a source of supplemental income for investors, which can be used to enhance the stock portfolio.
Risks in stocks yielding high dividends:
- The dividend amount and yield are not guaranteed. It depends on the profitability and the dividend policy of the company. The company might cut down its dividends in the future. As such, a high dividend yield in the past does not guarantee the same in the future.
- In case the company cuts down in dividends, it might lose investor confidence. This might make the stock prices depreciate, which is a double whammy for investors.
- Dividend income is taxable in the hands of investors. As such, even if you earn a dividend, you have to pay tax on the same at your tax slab rates.
- The dividend yield of different sectors varies. One sector can give very high dividends while the other might not despite having profitable companies.
Should you invest in high dividend yielding stocks?
While investing in dividend-yielding stocks is a good idea, you should expand your search. Don’t only look at the dividend history of a stock. Delve into other factors like the EBITDA, debt to equity ratio, and market capitalisation, and then make an informed choice. Even if you want attractive dividends, the dividend yield should not be the only deciding parameter when selecting stocks. Do broader research and check the company’s financial and technical stability to make your choice.
A little research, and you can build yourself a profitable portfolio!
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