There are different ways of earning money through stock market, one of them is earning in the form of dividends. Higher is the dividend more will be the amount received. Now it is the investor’s decision, what to do with that money? One of the ways to spend it, invest the amount received and increase your return.
WHAT ARE DIVIDENDS?
When you buy stocks of a company, in a way you are providing money to the company to do business. Due to your investment in the company, you are entitled to receive your part of the profit. This part reaches to you in the form of dividends. It is the distribution of reward from a portion of company’s earnings to the shareholders. The amount which the shareholders will receive is decided by the board of directors of the company. They can be issued for the shareholders in different forms such as cash dividend or shares. The amount of dividend which a company pays to its shareholders is used to determine the dividend yield of the company. Dividend yield acts as an essential parameter in fundamental analysis.
Higher the dividend yield better it is considered for investment. But, there’s a loop involved here. Some market experts consider high dividend yield bad. As high dividend yield is generally a common characteristic of blue chip stocks. And the blue chip stocks belong to very large and well established companies. As the companies are already large in size, therefore they have less scope of expansion. This hinders the rate of return of the stocks.
While on the other hand, some take it as a positive. As high dividend stocks belong to blue chip companies, therefore they bring stability to the portfolio, due to their good management and market presence. Therefore, it becomes very important to know on which side you lie. Buying high dividend stocks is a characteristic of safe investor.
BENEFITS OF BUYING HIGH DIVIDEND STOCKS:
- Buying high dividend stocks gives the opportunity to invest back the received amount and increase your returns. According to reports, if the amount received through dividends are re-invested then they have raised the return by 24% in any investment for more than 5 years.
- Buying high dividend stocks can also become a source of good income in your old age. Consider an example in which you have 100,000 stocks of a particular company. The company pays a dividend of 10 rupees annually. This would imply a total dividend of 1,000,000 rupees per annum. And also the value of those stocks will generate good net worth for you.
- Dividends are regular source of income. There are many cases available in which an investor remains invested in a particular stock for a very long period of time. During this period, due to the concept of compounding in stock market the investments will generate a good net worth and also would result into large number of stocks available with the investor. In the mean time the investor will regularly be receiving money, without selling the stocks, in the form of dividends. And more is the dividend and number of stocks, more will be the income. This is also the reason why, mutual funds end up buying high dividend stocks.
- As I have already stated, that buying high dividend stocks means buying stocks of a large well established company. Due to their large size they do not show a sudden and swift movement in any direction. And so, when the market bleeds red, these stocks do not fall much. Thus not eroding much part of the investment.
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