Highest Dividend Paying Stocks: All you need to Know

All investors invest to make money in the stock market, with the rule of capital appreciation or in other words, investors often use the "Buy Low and Sell High" technique. 

Every investor wishes to be a millionaire by this capital appreciation thumb rule, but it can only happen if the company they've invested in, is growing consistently. Capital appreciation is the best way to make money in the stock market that everyone already knows. What could be another way to make money?

Well, dividends are another way to make money by investing in dividend stocks. That means whenever a company will earn profits, that profit will be shared among the shareholders of the company.

Let's take a look into two important things before going deeper into Dividend stocks:

1. Dividends are optional. The company is not legally bound to pay dividends to its investors. That is on their will.
2. Mostly, investors are paid dividends when the company earns profits. However, the company can also pay dividends when the company is going on losses, but this discretionary. A company can pay as they want to.

"Dividend is a distribution of the profit earned by a company, decided by the boars of the company, to distribute among the company's shareholders. A dividend can be paid in the form of cash, shares of stock, or other property".

When a company earns profit, the company can use that profit in various ways like raising new capital, starting new projects, etc. Most fast-growing companies use these strategies to expand their business. 

The company can also distribute profits among its owners and shareholders. It can also distribute one half of the profit between the majority of shareholders and use the other half to expand their business.  

Why Dividends Matter to Investors?

Suppose you have been investing in a company for a long period of 10-15 years. If the company does not give the dividend from their profit, there is no way left to get money except for when you sell your stocks, or your investment is growing. 

If the company offers you to pay 4-5% of dividend on a regular yearly basis, only then will you receive the returns of your investments. In that case, your capital is growing as you do not need to sell stocks, and you are getting dividends from the company as a loyal shareholder. 

Getting regular dividends for years suggests that the company is performing well in the market, and the financial condition of the company is good. On the other hand, if the company is paying irregular dividends, that means the company is not doing well in the market. In that case, dividend yields might be the best option for long-term investors. 

That is why dividends matter to long-term investors as a long-term investment in the company offers investors a good return and increases investors' capital.

Let's understand a few financial terms before going into the best dividend policies in the country.

Important Financial Terms Regarding Dividend

Here are a few important financial terms that every investor should know. These terms are frequently used while discussing Dividend stocks.

Dividend Yield

Dividend yield shows how much dividend a company pays in a year. The dividend yield is expressed as a percentage of the current market price. It gives an idea of how much return an investor earned from his investments. 

Dividend yield can be calculated with the following formula:

Dividend yield = (Annual Dividend per share)/ (Current share price) * 100

For example, the price of a company's share is Rs. 1000, and it offers a dividend of Rs. 50 this year. Hence, the Dividend yield will be 5%.

A high dividend yield does not always mean a good dividend stock.

Dividend Percentage 

This is the ratio of the dividend given by the company to the face value of the share.

Dividend Payout

Dividend payout shows how much dividend a company has paid out to its shareholders from the net income of the company. When a company earns a profit, it either reinvests the money to expand its wealth or distributes it among its shareholders. 

Hence it is the percentage of  Profit/Earnings that is paid out as dividends.

Dividend payout can be calculated with the following formula:

Dividend payout = Annual Dividend Per Share / Net Income

Things to Keep in Mind Before Investing

Before looking at the dividend, here are a few more things that investors should keep in mind:

Analyze the Ratio

A high yield ratio means that the company is not reinvesting the larger portion of the profit. That can be seen with the formula. If the company is paying higher dividends to its investors, that means that the company is not reinvesting the money to expand its wealth. 

Dynamic Yield Ratio

Share market's prices are dynamic as they can change any minute or according to the trending session. This means that the dividend yield will also vary accordingly.

Dividend Analysis

Just an analysis of the above-mentioned dividend ratios and figures should not be the only reason behind an investment decision. Even the highest paying dividends can turn out to be a bad investment decision.

Do Not Look At Absolute Dividend Numbers  

Do not look at these numbers from a decision-making point of view. A Rs 1000 per share dividend does not necessarily speak high of the company. Similarly, a Rs 100 per share dividend does not speak low of the company. 

The highest dividend-paying stocks are not always good investments. You need to look at the company's earnings, the number of outstanding shares, shareholders, and other metrics and this is where the ratios come into play. The dividend needs to be looked at in correspondence with the net profit.

Advantages of Investing in Dividend Stocks 

Here are some key benefits of Dividend stocks:

• Investing in dividend stocks is one way to generate wealth and create a source of income from your investments. Dividend stocks offer profits to their investors in two ways: Stock price appreciation and payout paid by the company.
• Some big and stable companies offer the majority of their profits as a dividend to its shareholders to establish goodwill of the company in the market.
• A good track record of dividend payment shows that the company is growing and is stable in the market to offer regular dividends to its investors.
• Dividend stocks provide the ability to generate income that increases and maintains the purchasing power of your principal and income.

Best Dividend Stocks in India

Here are some of the best dividend stocks that have been paying consistent dividend payout to their investors over the years:

*Disclaimer: We do not endorse any of the above companies. These figures are based on the recent public data.

**Market cap values are subject to regular market change.

Closing Thoughts

A smart investor always invests in a company that can offer them with consistent dividends without any cuts, for a longer period. Investors should not just look at the higher dividend payout for a year or two. They should look at the consistency of the dividend payments. This is the reason the company's fundamentals should be strong enough to attract new investors to invest in their company.

There are other factors to look at which include details like the company's history, business outreach, debt condition of the company, management quality, etc apart from the higher dividend payment. 
It is always advisable to do your own prior research of the company before investing and make the right choice to invest your money.