Imagine the day you buy a stock it becomes bearish and starts falling, and decreasing the loss, you decide to hold the stock until it recovers. You make no profit for two years, and exiting is not an option for you. During such situations, the dividends given out by the company acts as the only source of earning profits.
For long-term investors, it is necessary to look out for such stocks to add to their portfolio regularly to earn a certain amount of money. This helps them to plan for their long-term goals as well as add extra money to their wealth. So, what exactly is a dividend, and why do few companies payout these dividends regularly?What is a dividend?
Dividends are paid out by the company to the shareholders in case they incur profits in the quarter. These dividends are paid on a per-share basis. For example, if you own five stocks of the company that declares a dividend of Rs. 10, then you would be receiving Rs. 50 (5×10) as a dividend. A company doesn't necessarily give out dividends if they make a profit. They may utilize the profit somehow, like for development projects or to pay off their debts.
In case the company incurs loss during the quarter but holds strong cash reserves, it might still consider rewarding the shareholders with dividends.Why a company gives dividends?
Sometimes the company may have enough cash reserves but no growth opportunities in store, and hence instead of accumulating these reserves, it decides to pay dividends to the shareholders. This further helps the company to attract new investors as it demonstrates the company's solid financial strength and effective management.When are dividends declared?
Every year a company conducts an Annual General Meeting, during which the board of directors of the company comes together. During AGM, the company's audited financial statements are presented in front of the board of directors and shareholders, and accordingly, the company proposes a rate of dividend, which is put forth for approval. Such dividend, which is paid after conducting an annual general meeting, is called a Final Dividend.
Apart from that, a company also rewards the shareholders with interim dividends, declared before the annual General Meeting. Interim Dividends are paid out more than once during a financial year. Although these dividends are announced frequently, they tend to be lower than the final dividend.Who receives the dividend?
Since many individuals buy or sell shares daily, it was difficult to identify the individuals who become eligible for the dividend and to eliminate this problem, the stock market follows a certain timeline, which is:
- Dividend Declaration date:On this date, the Annual general meeting takes place.
- Ex-Dividend Date:Shareholders who own the shares before this date become eligible to receive dividends. For example, if the Ex-Dividend date of 'A' stock is 20th April, you must execute your buy order on 17th April to gain ownership of the shares on the said date.
- Record Date:On this day, the company considers the shareholder who owns the shares in their Demat account.
- Dividend Payout Date: This is when the dividend amount gets credited into your bank account.
When the company pays out dividends, the company's stock price tends to fall by the number of dividends paid out as the company no longer holds those reserves.Which stocks yield good dividends?
Here is a list of stocks that pay dividends regularly
- ITC Limited (ITC):It is a Tabaco company that was founded in the year 1910, and since then, it has diversified its portfolio into different sectors Cigarettes, FMCG, Hotels, Packaging, Paperboards, and Specialty Papers. It is a debt-free company whose debt-to-equity ratio is 0. As of April 2021, the company's market cap stands at Rs. 2,52,700 crores. The stock's dividend yield is 4.94%, and its dividend per share is 10.15%. Since 2001, the company has consistently paid out dividends every year. In July 2020, ITC announced a final dividend of Rs. 10.15 per share and interim dividend of Rs. 5 per share in February 2021. Although it doesn't give high returns in the short term, the company gives high dividends to its shareholders.
- Gail Limited (GAIL):Gail Limited is a company that is owned by the Indian government and is engaged in processing and distributing natural gas. The company's debt to equity ratio stands at 0.13 and dividend per share at 6.40. The stock's dividend yield is 4.92%. In March 2021, although the company announced a dividend of Rs. 2.5, investors must note that it pays interim dividends frequently, i.e., least once per year.
- Power Grid Corporation (POWERGRID): It is an electricity board undertaking owned by the Indian government. At present, the company's market capitalization is Rs. 1,12,897 crore and a dividend yield of 4.63%. The company uses its capital effectively to generate profits, and as a result, has declared dividends every year. In December 2020, the company announced an interim dividend of Rs. 5 per share, followed by another interim dividend of Rs. 4 per share in March 2021. Although the company's debt to equity is more than 1, i.e., 2.14, it has improved its operating cash flow for the last two years.
- Indiabulls Housing Finance (IBULHSGF): It is the second-largest housing finance company that lends mortgage and is regulated by the National Housing Bank. Although the company has a market cap of Rs. 8,287 crores, the company is known for regular and frequent dividend payouts and has a dividend yield of 17.29%. Even though the company's debt to equity ratio is 5.13, which is higher, it has never failed to declare an interim dividend. In FY19, it has declared interim dividends between Rs. 7 and Rs. 10 in every quarter.
- Hero MotorCorp (HEROMOTOCO): Formerly known as Hero Honda, Hero MotorCorp Limited is an Indian Multinational 2-wheeler manufacturing company that owns a 46% share in the market. It is a fairly valued company with a market cap of Rs. 57,228 crores. The company's debt to equity ratio is 0.01%, meaning it is a low debt company with strong fundamentals. The stock yields a dividend of 3.14%, which can be reflected through its dividend payouts. The company has given exponential final and interim dividends every year. In July 2020, the company announced a final dividend valued at Rs. 12.50 per share, whereas in February 2021, the company paid Rs. 65 per share as an interim dividend. Apart from that, the company also announced a special dividend of Rs. 5 per share.
It is necessary to diversify our portfolio into different sectors and segments. The stocks as mentioned earlier reward investors with predictable income from regular dividends. These stocks will help investors with long-term horizons to build wealth gradually. It is necessary to look out for such stocks to receive maximum benefits and profits from the stock market.