High Dividend Stocks as an Investment Strategy

Champion investors love dividend paying stocks. They love the feel of passive income and positive cash flow. What about you? Do you love the feeling of tax free dividend income making its way right into your bank account while your stocks continue to do well?

Investing in high dividend stocks is a great long term investment strategy, but it is always better to understand its pros and cons.

Ready to invest? Then find out what are the best high dividend stocks to invest in...
Read on..

What is Dividend?

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. Since it is shared from the company's cash reserves or profits, it generally indicates a healthy stock that you are holding.

Tax on Dividends

Dividends is a 100% tax free income in the hands of the shareholder. However, Dividend Distribution Tax (DDT) is usually paid by the company when they declare the dividends. As far as you, as an investor is concerned., you are not liable to pay any taxes on dividends. Your dividend income is 100% exempt from income tax. Read more about DDT (Dividend Distribution Tax) by clicking here.

Div Yield Vs Dividend %

As an investor, you should be usually focused on the Dividend Yield. Dividend Yield essentially tells you the % return on your investment (at the current stock price). Do not get confused with the Dividend % that the companies usually declare - which can be higher than 100% also in some cases.

As an example, if a stock's Face Value was Rs. 10 when it was introduced, maybe 10 years back, and now the stock price has reached Rs. 1,000/-, and the company declares 100% dividend, then this means a dividend of Rs. 10/- per stock (100% of the face value of stock price). But if you have purchased the stock for Rs. 1,000/-, your Dividend Yield would be only 1%. This is the actual Return on your investment, and this is what matters for an investor. This also means that your Dividend Yield may vary depending on the price at which you buy the stock. So, the yield could be different for 2 different investors buying the stock of a same company on two adjacent days.

Read more about Dividend Yield here...

Stocks that offer high dividends in India

There are thousands of companies paying high dividends, but you must be careful here. Investing for good dividends should not be at the risk to your principle investment. You can see a list of most of the Dividend Paying companies along with their track record of dividends at the below link:

http://www.moneycontrol.com/stocks/marketstats/bsetopdiv/

To counter this risk, the most common investment strategy is to look for blue chip companies paying high dividends. Below is the list of the Top 30 Blue Chip companies in India that pay high dividends:

Merits of High Dividend Stocks

1. Dividend paying stocks are usually more stable. When stock market crashes, dividend stocks stands tall. When everywhere there is panic, dividend stocks provides stability. People continue to hold on to dividend stocks even during market crash. The reason is simple, they continue to earn dividends even during market crash. In fact, champion investors end up buying more when such stocks crash because they can lower the average cost of purchase and therefore increase the Dividend Yield.
2. If equity can generate regular income, there cannot be a better investment. And earning Dividends is the best way to generate stable passive income. Once investors get hold of a good dividend stocks, they never sell them. This gives dividend paying stocks its price stability.
3. Value investors considers high dividend yield as a strong value indicator. Improving sales and profit figures are one of the strongest fundamental indicators of quality stocks. Companies which shares its profits consistently (dividends) are confident companies.

Demerits of High Dividend Stocks

1. Now, this is Catch 22. If a company is paying majority of its profits to its shareholders, it is obviously not keen on investing this profit for business expansion and further growth. This sometimes limits the capital appreciation of your stock, since the growth of the company is constrained.
2. Beware of companies with fluctuating dividends and weak fundamentals. These could be new players trying to attract investors.
3. Needless to say, Dividends cannot be the only criteria for you to buy a stock. The value analysis of a stock is equally essential to buy it at the right price.

Summary

If you are a champion investor and looking for long term regular passive income, High Dividend Yield Blue Chip Stocks are your best bet. But if you are looking for high growth stocks, you better look out for value stocks that re-invest their profits for growth. Personally, I favor the former.

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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.

Cheers

Manoj Arora

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