Dividends are form of passive income…

How to generate dividend income? By buying dividend paying stocks at right price.

What makes dividends, one of the best passive income? Number one reason is, they originate from equity.

What makes equity-factor so special here? Equity yield can improve with time.

A stock which is yielding 0.5% at the time of purchase, can yield much higher with passage of time.

Let me give you two examples:

TCS:
Suppose a person bought shares of TCS in year Mar’09. Details are as below:

Share Price (2009): Rs.132/share.
No of shares bought: 10 nos.
Cost paid to buy TCS: Rs.1,320.
Dividend paid in 2009: Rs.14/share.
Total dividend income in 2009: Rs.140.
Dividend yield in 2009: 10.6%.
Suppose this person held on to his shares till year 2018.

What will be his dividend yield as on Mar’18?

[Note: Bonus shares 1:1 was also issued to all shareholders between Mar’09 & Mar’18]

Cost paid to buy TCS: Rs.1,320.
No. of shares held in 2018: 20 nos (1:1 bonus share)
Dividend paid in 2018: Rs.50/share.
Total dividend income in 2018: Rs.1,000
Dividend yield in 2018: 75.7%.
Dividend Yield in 2009: 10.6%

Dividend Yield in 2018: 75.7%

If the example of TCS is looking to good to believe, let’s take a more submissive example.

HUL:
Suppose a person bought 10 nos shares of Hindustan Unilever Ltd (HUL) in 2009.

Share Price (2009): Rs.239/share.
No of shares bought: 10 nos.
Cost paid to buy HUL: Rs.2,390.
Dividend paid in 2009: Rs.7.5/share.
Total dividend income in 2009: Rs.75.
Dividend yield in 2009: 3.15%.
Suppose this person held on to HUL shares till year 2018. What will be his dividend yield as on Mar’18?

[Note: No bonus shares were issued to shareholders between Mar’09 & Mar’18]

Cost paid to buy HUL: Rs.2,390.
No. of shares held in 2018: 10 nos.
Dividend paid in 2018: Rs.20/share.
Total dividend income in 2018: Rs.200
Dividend yield in 2018: 8.36%.
Dividend Yield in 2009: 3.15%

Dividend Yield in 2018: 8.36%

What does the above 2 examples of TCS and HUL suggest?

Just by holding on to “good stocks” for long term (10 years), their dividend yield itself will become high enough to beat the returns of any debt instrument.

Is it that easy? Buy dividend paying stocks, hold for long term, and that’s it?

Yes it is this easy. The only control point is, one must buy only “good stocks“.