How to make One lakh from Dividends?

Ever wondered about making money effortlessly or securing a financial backup plan? Well, say hello to the world of dividend investing! It's not just about investing in the stock market; it's like getting paid regularly just for holding onto some company's shares. In this quick guide, we're spilling the beans on tricks, tips, and strategies to help you rake in one lakh through dividends.

The Basics: What are Dividends?

Whenever a company makes profits, it has three choices: 

First, it could invest the money back into the business for research and development, marketing, acquiring assets; second, it might decide to play it safe and keep the money stored up. But here's where it gets interesting – choice number three involves showering the shareholders with a piece of the profit pie, and we call this "dividends." It's like earning interest, but cooler, as it's all part of owning a slice of the stock market action.

Dividend income is similar to earning interest from a bank for holding your money in a savings account. For example, if you own a share valued at Rs. 100 with a 5% annual dividend yield, the company pays you Rs. 5 each year in dividend income.

Building Your Knowledge: How Do Dividends Work?

Investors can earn money through dividends by purchasing stocks, holding them for the long term, and receiving payouts when the company generates revenue surplus. The decision to buy a share depends on various factors like management quality, industry outlook, financials, competitive strength, and the share's price. Dividends play a crucial role in deciding which shares to purchase, providing a reliable source of return and a cash supply for further growth.

Mechanics of Dividend Payments: How Are Dividends Paid?

Dividend payments are linked to a company's profitability rather than its share price, giving companies the option to pay dividends even in challenging market periods. Stocks that pay dividends are often more resistant to market volatility and may qualify for favorable tax deductions. Businesses with a history of continuous dividend payments usually have stable, substantial cash flow, making them attractive to investors.

Is it a Must for Companies to Pay Dividends?

Companies have the flexibility to choose whether or not to pay dividends. Fast-growing companies may opt to reinvest profits for future growth, while stable-growth companies often use dividends to retain shareholders and encourage reinvestment. The decision to pay dividends leads to different routes: residual, stable, or hybrid, each impacting investor income streams and overall company profitability.

Strategies for Shareholder Returns: Dividends vs. Buybacks

Companies may opt for buyback programs if it has cash lying around as repurchasing shares to reduce the number available in the market. This strategy can increase earnings-per-share, cash-flow-per-share, and improve performance metrics like return on equity. The choice between dividends and buybacks depends on the company's situation and tax implications.

Impact on Stock Prices: After a Stock Dividend

Following a stock dividend declaration, a proportionate decrease in the stock price is often noticed. This occurs because a stock dividend lowers the book value per common share while the company's overall worth remains the same.

Cracking the Code: How to Evaluate Dividend Stocks

When you're on the lookout for the best dividend-paying stocks, the term you need to get cozy with is "dividend yield." Many websites boast tools to find high-yielding stocks, but don't let the numbers fool you. Let's break it down with a story.

Imagine a stock that used to be valued at Rs. 100, paying Rs. 10 in annual dividends. All good, right? But suddenly, the company faces a rough patch, and its shares drop to Rs. 50. Yet, it's still dishing out Rs. 10 in dividends. Now, your dividend yield has doubled from 10% to 20%. But here's the twist—it's not a sign of a healthy company; it's a red flag. So do not just look at the dividend yield in isolation. Anlayse the company thoroughly before investing as if the share price of the company is decreasing, it may not offer you capital appreciation and your overall returns from the investment may turn negative.

Reliability Matters: Trust the Dividend Aristocrats

Reliability becomes your sidekick in this journey. Ask yourself, "Can this company keep its promises, steadily paying and maybe even increasing dividends over time?"
One reliable hotspot is the "dividend aristocrats"—stocks with a history of increasing dividends. If a company has a history of increasing the dividends that can signal that the company is growing its profits and hence is a good sign.

Payout Ratio: The Unsung Hero

Don't ignore the payout ratio. It compares a company's earnings to its dividend payment per share. A lower ratio hints at sustainable dividends, while a ratio over 100% suggests potential trouble. A steadily rising ratio, though, signals a healthy, reliable company in a mature industry.

Strategies for Picking Dividend Stocks

Mixing and Matching: Defensive Criteria

Blend your dividend strategy with defensive factors. For example, consider high dividend-yielding stocks in the healthcare or FMCG sectors. Hunt for companies riding the wave of growing demand.
Also, throw in a preference for low-debt companies. When the economic tide gets rough, most managements prioritize paying off debt over distributing dividends to shareholders. Spend some quality time crafting a list of defensive criteria to pinpoint your preferred companies.

Your Investment Menu: Top Dividend Paying Stocks in India 2024

Wondering where to put your money in the Indian stock market? Here's a quick menu of some of the highest dividend-paying stocks, from giants to the rising stars:

Conclusion

Investing in high dividend-paying stocks is a smart strategy during bear markets. But finding the right dividend-yielding stocks is key. While investing in companies with increasing dividends is a gem, remember they might not be the stars during market rallies. So, let them play a supporting role in your portfolio.