People are attracted to the stock market for various reasons. Many participate in the market for the thrill of trading, some others in anticipation of handsome appreciation of stock market investments and some for the dividends which companies distribute among shareholders.
The profits earned by companies will be used for expansion or ploughed back into the company as ‘Reserves’ or distributed among shareholders as dividend. Just like a deposit in a bank earns interest without any activity on the part of the depositor, dividend paying stocks provide passive income to the investors.
If your primary objective of buying stocks is to earn dividend, you have take the trouble of choosing the right stocks. First prepare a list of dividend paying stocks or get it either from the stock exchange website or from your broker.
Important Things to Remember While Choosing Stocks for Dividends:
- Mark the good companies in the list. Since you plan to stay invested for a long time it is better to select blue chip stocks.
- Leave out the high growth stocks. They would use all their profits for company expansion.
- Check the dividend history. Companies which have not been paying dividends regularly would not suit your objective.
- Make sure that the company earns regular profits. Buying stocks of a loss making company which pays dividend from surplus reserves would not be a wise investment decision.
- Go through the company’s financial statement and see if they set aside reserves. A company with reserves will use them to pay dividends even in quarters when the profits are not substantial.
- Check out the dividend yield. While you need to get a decent percentage of return, buying a stock with a very high dividend yield may be risky.
- Calculate significant ratios especially the debt ratios to check the company’s fiscal strength.
- Dividend paying shares which are trading below book value will ensure that you will get a good bargain.
After considering all these, make a final decision of companies you will invest in.Some investors buy stocks just to get the dividend and then sell it off after sometime. In countries like India, amount received as dividend is tax-free income which makes investment in dividend paying stocks an attractive option.
A few naïve investors even believe that they can profit out of the dividend. They do not realize that the day the stock goes ex- dividend, the share price also falls to the extent of the amount of the dividend.
The ex-dividend price of a stock is nothing but the share price stripped of its dividend. A person who buys the shares of a company on after its ex-dividend date will not get the dividend; the seller will receive the dividend. So a person who wishes to buy the stock of a company for its dividend has to do so before the ex-dividend date.
Those whose names appear as shareholders in the company’s records on the dividend record date will be paid dividend by the company. The dividend will be credited directly to the shareholder’s account on a later date.
A Few Facts About Dividend Paying Stocks:
- Dividend paying stocks are not meant for investors who are looking for quick returns. Dividend amounts are small and come only once in a quarter. It is meant for people who want a steady income from their share investments.
- Some stock market professionals are against investment in these stocks in uncertain times. But dividend paying stocks are even more attractive in such periods because they are available at low prices and the regular income will surely help.
- If you are not dependent on the dividend income, you can reinvest the dividend received in the stock market and benefit from the compounding effect.
- Traders may look down upon dividend investing as ‘old fashioned’ and ‘dull’. But this is the best option in the stock market for those looking for safety and regular income.