High dividend yield stocks

A company can utilize the profits it makes in two ways:

  • 1. Reinvest it into the business
  • 2. Share it with the shareholders of the company – pay dividends.

Dividend yield of a share is the ratio of dividend paid per share to the current stocks price of the share. Stocks that have a high dividend yield compared to a benchmark are called high-yield stocks or high dividend yield stocks. The benchmark selected varies with the analyst, and so do the stocks they consider as high-yield. A high-yield stock is considered a good investment as:

  • 1. High dividend yield indicates that the share is underpriced by the market
  • 2. Dividend can act as a source of passive income

How to assess the high dividend yield stocks?

While companies that have a high dividend yield are considered safe, it is important to remember that it is not the high yield that makes them safe. Rather, they have a high dividend yield because they are safe. Further, the dividend yield does not provide a complete picture. Dividend is but a portion of the returns you earn from a stock – rest of it is from capital appreciation. If you compare the dividend yield of a stock with the yield from a fixed deposit – you would typically find that the dividend yield is lower despite the higher risk that stock investments carry. A better way to assess a stock would be to look at its earnings yield instead. Most analysts use a forecast of future earnings when valuing a company.

How to understand which are the good dividend paying stock companies?

Once you have identified high dividend stocks, decide on which ones to invest in using fundamental analysis. Remember that stocks that pay dividends can always decide to reinvest without paying them if they run into bad times. That said, if you are investing for dividends – make sure that they are strong performers in their respective sectors, like blue chip stocks

Benefits of investing in high dividend yield stocks

  • Dividends act as a consistent income
  • If you reinvest dividends, your portfolio will grow at a healthy pace
  • In some cases, high-yield indicates the company can ride out tough markets

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“.