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What is Dividend? Are you betting on it?


Dividend is a part of the profit that a company shares with its shareholders. It can be referred to a reward, cash or otherwise the company gives to the shareholders. However, it is not obligatory for a company to pay a dividend.

And if you are interested in dividend investing, you should understand that dividend investing can make you create a stream of income with appreciation in your capital and assets.

Dividend Investing

When you invest in shares that pay a high dividend as you want to receive a regular income from your investments, said to be dividend investing. This income will be an add on to any growth that your portfolio experience as the stocks that you are holding gains value.

Many companies offer you to reinvest your dividend as they have a dividend reinvestment plan (DRIP) through which a shareholder can reinvest his dividends to buy additional shares of the company. It could be a beneficial strategy when your dividends are small.

Generally, the experience dividend investors strategically select and invest in stocks that pay a large dividend in other to make money.

How to Invest in Dividend for good profit

Invest in such stocks which reward you over time as part of its profit in the form of a dividend. Here are a few points that you keep in your mind while investing in dividend.

Safe Dividend-paying

Look for the cash-rich companies that has a history of stable income. Higher stability in the income of the company can bring you higher dividend payout.
Good dividend investors look for safe dividend-paying companies or how likely a company will continue to pay dividends at the same or higher rate. One can look for earning to dividend payout ratio for safe dividend income.

For example, there are two company, Say A and B, Both have earning of Rs. 1000 cr. A is paying Rs. 900 cr as dividends to its shareholders while B pays only Rs. 400 cr. The Company A would be better when we compare it on the basis of dividend-paying. However, dividend-paying depends on the sectorial nature of the company. A banking company less likely to pay a dividend as it favours to reinvest the profit.

Make a Strategy

A good dividend investor always follow a set of rules for his investing that might be starting from company selection and its performance expectations. A good dividend investor focuses on a high dividend yield or a higher dividend growth rate approach.

When you focus on a slow-growing company with stable cash flow, you aim on high dividend yield that allows you an immediate income in the form of a dividend. For example,
A stock pays Rs. 28 as dividend and you have bought that share around Rs. 80, the stock has given you a 24% dividend yield. If you had invested a lakh, you would have received Rs. 24000 in your dividend income.

On the other hand, when you invest in a quickly growing company which pays lower than average dividends currently, comes under a high dividend growth rate approach. This allows you to buy profitable stocks at a lower rate that will bring a chunk of income over a period of 5 or 10 years.

Different investor may prefer one approach over the other, this depends on whether the goal is to get immediate and stable income or long term growth and profit.

Both the approaches have different levels of risks, so it totally depends on your risk appetite, which way you go. However, one can choose the balanced approach by dividing his investment in both approaches.

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What is Dividend? Are you betting on it? Reviewed by Kumar Chandan on May 06, 2020 Rating: 5

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