Investing in stocks that pay consistent dividends are considered to be one of the smartest ways to make reliable source of regular income and consequently create wealth. There are various benefits of investing in companies that pay dividends. Moreover, when one considers to invest for the long-term, it is also a great mode of wealth creation.
While high-dividend stocks can provide consistent income, various dividend stocks also prove to be helpful in earning a passive income from them during retirement. Thus, high-dividend stocks are an important factor for retirement planning also. Retail investors looking for a steady source of income from the stock markets generally invest in companies that extend steady dividends and also have a strong growth potential.
The underlying concept is that when individuals buy stocks, they generate returns from two sources- capital appreciation and dividends. The main idea is to identify high-dividend stocks by examining the reasons behind the high-dividend payout. This will help you in understanding which companies are worth investing in.
What are Dividends?
Dividends basically refer to the share of profits that a company distributes to its shareholders. It is a payment distributed from a company’s earnings to share with investors, i.e., shareholders.
Dividend is declared by the Board of Directors of a company and has to be approved by the shareholders of the company and can be paid quarterly, half-yearly or annually.
How Dividend Stocks work?
Let us take an example to see how Dividend Stocks work.
Let us assume that X buys 1000 shares of a company for Rs. 10 each and each share pays a dividend of Rs. 0.50 per year. If X invests Rs. 10,000, over a period of one year, X would receive Rs. 500 in dividend payments. It means that the dividend yield would be 5%.
Dividends are really fruitful because regardless of the fact that the company’s stock price goes up or down, one would receive those dividend payments as long as the company decides to distribute them.
Dividend Investing can be a great investment strategy as the returns earned from investing dividends can grow over time. Also, because of their low volatility, dividend stocks are appealing for investors looking for low-risk investments.
What are High Dividend-Yield Stocks?
The term Dividend Yield means the income through dividend that investors would get against the current price of stocks they have invested in.
Dividend Yield can be calculated as:
Dividend Yield= (Annual Dividend/Share Price) x 100
Stocks that generate a higher dividend yield as compared against a specific benchmark are known as high-dividend stocks. High-yield dividend stocks are characterized by regular earnings and less susceptibility to major economic cycles.
One can invest in high-yield dividend stocks because they can be used to enhance your portfolio (by reinvesting).
To summarize, Companies that pay sustainable and growing dividends are more resilient in down markets. Also, investors invest vastly in dividend stocks and buy them even in downturns because of their attractive yield. Today, when inflationary pressures are so high and there are recession fears over the world, it is important to diversify some part of your portfolio to dividend paying stocks to balance the risk in some way.
Thus, among the various other benefits of high-yield dividend paying stocks, one of them is wealth creation also. If one plans systematically and reinvests their dividends in a careful manner, they can create wealth over time; through discipline, compounding affect and capital growth.
It is quite beneficial for investors to make money from high dividend yield stocks as they can become a steady source of income over a period of time. Also, dividends earned passively are often reinvested by investors in the stock market to create wealth in the long run. Investors should assess the consistency of dividend paid over the years and also note the consistent growth in the percentage of dividend to find out which company’s stock works the best for them.
One must choose stocks that give a high dividend consistently over the past several years. Also, a good stock at the wrong price can be a bad investment. Lastly, it is very important to carry out a thorough due diligence and ensure that one is completely aware of the investment risks, risk profile and investment objectives before they select the stock in which they want to invest.