How to Identify High-Dividend Paying Stocks- Investing101 ep.1

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Investors who invest in stocks of companies sometimes get company payouts in the form of dividends. High dividend-yield or dividend-paying stocks give investors dividends because they earn profits and wish to distribute a portion of their profits to shareholders. Stocks with the highest dividends may be the ones that most serious investors pick. 

What are Dividends?

When you own shares in a company, you become a shareholder and essentially contribute to the income of the company (by buying the shares). Companies, especially large-capitalisation companies, are in the practice of distributing a portion of their profits to shareholders in the form of dividend payouts, called dividends. Dividend payouts are paid per share that is owned and are paid to shareholders as a kind of reward for remaining loyal to the company through investment and support. 

Larger and more established companies tend to generate regular dividend payments to shareholders (some as frequently as once or twice a year) than small companies that are just in their phases of development. Such companies generate stocks with the highest dividends. As companies evolve and grow large, they may generate dividends and these payments may increase depending on the corresponding profit of companies. Dividend-yield stocks are attractive to investors as they almost always assure investors of a regular income source. 

Why Invest in High-Dividend Yield Stocks in India?

In case you are wondering whether you should consider high-dividend paying stocks as an investment, you may think of the fact that they generate a regular supplementary income. This fact is viewed as the most attractive by investors who benefit from the dividends of large companies. 

Another advantage that such stocks offer is that they may be viewed as generating a compounding effect where your investments are concerned. Dividend payouts mean some extra money for investors to re-invest in more shares of the same company or invest in other income-generating investment instruments. Dividends are typically generated by large blue-chip businesses that have solid financials and fundamentally strong foundations. You could find some of the most high dividend-paying stocks in the Nifty 50 Index. These companies may be worth investing in as they may potentially withstand the forces of market volatility and provide stability in a portfolio. Furthermore, during inflationary periods, dividends may keep investors stress-free due to the additional income source. 

Long-term Investment and Dividends

Investors typically invest in large-cap stocks with the highest dividends with a long-term investment horizon. With such a view, holding on to large-cap stocks of reputed companies may potentially yield high returns as well as give you regular dividends. Here are some features of high-dividend yielding stocks (companies) you should consider when you are trying to identify such companies to invest in: 

  • Identify Dividend Companies that Give You Increasing Dividends

Some large companies (“aristocrats” or “champions”) may have a history of paying dividends with increasing frequency and increasing amounts (per share) of the dividends they release. Companies that have consistently paid increasing amounts of dividends for the past 10 years may be in this category. 

  • Check Out India’s Top 100 Companies

Related to the previous point, you can examine India’s top companies, large firms that give out dividends regularly and on time. High dividend-paying companies in India are some of the ones that yield blue chip stocks. 

Selecting the Right Companies

While you are making your choice of companies to invest in for their high-dividend payouts, you will have to check certain company aspects to know about the company’s strength and consistency in generating dividends. Here are things to pay attention to: 

  • Analyse the dividend growth rate and dividend yield of the company. The dividend yield of any strong dividend-paying company should be more than 3%. 
  • The company should be financially strong. From this information, investors get to know the growth prospects of any company and consequently, whether dividends will continue/increase. To gain details of a company’s financial data, you can examine the company’s cash flow, income statement, and balance sheet.
  • Understand the payout ratio of the company which is the portion that the company distributes as dividends. Typically, if the payout ratio is below 60%, the company may be viewed as a stable company and may be included in the list of good dividend-paying stocks in India. 
  • Evaluate the industry trends relating to the company and assess its management. The financial health and status of a company have a lot to do with its position in the industry it belongs to. Industry trends will also give you a clue as to how the company is growing and if its products and services have the potential to make it a leader in the industry. You can also assess the company’s management to give you an idea about the direction a company is headed in. All this tells you about its solidarity in the economy and whether it is in great shape to hand out dividends in the future. 

Invest in Dividend-Yield Companies Today!

As you may have gauged, investment is a process that begins with evaluating a company’s strengths and weaknesses, if you are investing in a company’s stocks. In this regard, choosing stocks with the highest dividends may involve in-depth research into a company’s performance and its position in the financial markets. If you are investing in a company mainly for its reliability to give you consistent dividend payouts, your research could pay off in selecting some of the best large-cap companies that give you a supplementary income source. 

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