How to invest in dividend stocks in India?
What is the benefit of dividend stocks in India?
If you are a very conservative investor and looking to invest in the stock market for the first time, then you must consider investing in dividend stocks. Dividends are nothing but the extra revenue shared by the company with its shareholders. There is no compulsion that every company should provide dividends.
If a company is providing healthy dividends then it means that the company balance sheet is good and they want to maintain a healthy relationship with its shareholders.
How dividend is calculated?
The dividend is calculated based on the Face value of the stock.
Generally, face value of the stock during IPO is 10 and after a while, it can go for a split.
Let us take an example of a stock with a face value of 10.
Example: Coal India limited
Coal India is Government PSU and it has given healthy dividends from the time of listing.
Share value is 200.70 at the time of taking this screenshot.
Face Value is 10. Dividend given in the last year is 13.1
The dividend yield is calculated based on the dividend given divided by Share value.
Dividend yield = Dividend / Share Value
Dividend yield = 13.1 / 200.70
If you are depositing an amount in Bank, the deposit rates have dropped below 6.5%
Now compare it with this dividend yield of 6.5% which is way better. One more advantage is that stock move might move higher and easily any investor in this stock can make more than 10% in a year.
Is looking at dividend yield is safe?
When you search in google with this dividend yield, you will get many stocks which is having higher yield %.
In the above example itself, for a while, coal India stock price went down till 170.
At that price dividend yield would have been showing as 7.7% ( 13.1/170)
So you also need to look into the fundamentals of the company before buying any stock for dividends.
Let us look at Avanti feeds, one of the small-cap stocks which has created wealth int he last 7 years. They are consistent dividend payers and lats year their dividend was 4Rs.
Dividend yield for this Avanti feeds stock comes only .70% ( 4/569.7 = .70%)
The market price of this stock is 569.7 and hence the dividend yield has gone down.
Generally, year on year dividend is decided based on the company board and there is no fixed rule that it has to be declared. Don’t choose a stock if the price has fallen in the last month. This might be the reason for the higher dividend yield.
How to choose a dividend stock?
PSU stocks are generally good dividend payers. The government holds more than 70% in the majority of the companies and they will be in need of money. Dividends are a way to generate the required money for the government.
Along with these PSU banks, FMCG companies and certain companies had got their name by the way they had paid their dividends. TTK Prestige, Hawkins, Godrej consumer products, etc are certain companies that had paid dividends generously. These dividends are tax-free. Tax is already paid by companies and you don’t need to pay tax.
Along with dividend yield please check the PE ratio of the company. Do the fundamental aspect check of the company in trendlyne.com. Once you input the stock name, it will list down every data and also the reports prepared by major securities.
In your portfolio, invest a portion of the amount in dividend stocks for yearly tax-free dividends.