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By Team Ace Investors
Why Invest in Dividend Stocks?
In the current scenario, when the interest rates are at its historic low and the markets are falling due to the coronavirus outbreak, investors can start building their portfolio by investing in well-established companies available at discounted valuation with high dividend yield. At this time, investors should turn their attention to dividend growth and dividend pay-out ratio instead of daily stock price movement.
Dividend yield: The dividend is the part of the profit which a company pays out in the form of a dividend to its shareholders either quarterly or half-yearly. The dividend yield is a great way of measuring the amount of return that an investor will be able to generate from its stock investment.
Dividend stocks can be a great choice for investors looking for regular income, retirees or risk-averse investors. The advantages of investing for dividends, particularly at times when the markets are down are:
- Tax-free rate of return (in case of fully franked dividend) – When the fully franked dividend is declared, then the company pays tax on the entire dividend. Investors receive 100% of the tax paid on the dividend as franking credits.
- Capital Gain – By investing in quality companies, there are high chances of making huge capital gains in the future, once the market revives.
While picking up stocks, investors need to do proper research to find out what has led to the fall in stock prices. It may be because of various other reasons like falling profitability, government regulatory policy, plant shutdown, etc. Keep in mind that the company pays dividends out of its profits. When profitability declines, sooner or later it will revise its dividend distribution strategy.
Factors to Evaluate While Considering Investing in Dividend Stocks
Consistency in dividend distribution and the probability of sustained higher dividends in the future are 2 important aspects to consider when investing with a view to earning dividend income. Other than these, investors should look at: Historic Dividend Yields – check the dividend yield history of the stock for the past 3-5 years and Dividend Pay-out History, which highlights the proportion of the company’s profit which the company pays out as a dividend.
How Investors Can make Most from Its Investments – Best investment style for investors looking to invest in stocks with high dividend yield should be – Whenever these dividend-paying companies to become available at discount or below certain target price that you have in mind, buy few stocks of these companies with a view to holding on to them forever. In this way, you will slowly and gradually build a portfolio of well-established dividend stocks.
We believe that investing in high dividend yield stocks which, if done with discipline could prove to be an excellent way of making extraordinary returns from stock markets. Particularly in the current scenario, when there is a slowdown in the economy and the stock markets are so uncertain.
Happy Dividend Investing!!
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