How to identify best dividend paying stocks and make best out of them?

Dividend Paying Stocks - Although capital appreciation is the first choice of investors in comparison with dividend income, that does not make dividend less worthy. Despite the fact, that capital appreciation yields are higher; it is volatile and risk associated. On the other hand, income from the dividend is balanced and predictable.

Most importantly, Dividends are a great source of “Passive Income”. Once you have invested in the dividends, it continues to pay you for long term; you just need to buy, sit back and enjoy the consistent flow of dividends. The income from the dividends keeps growing with the pace of Company’s growth. Simply by holding a good stock for long term (10 years or more), their dividend yield itself will become high enough to beat the returns of any debt.

Suppose this person held on to his shares till year 2018. What will be his dividend yield as on Mar’18? [Additionally, company issued bonus shares 1:1 to all shareholders between Mar’09 & Mar’18, which simply doubles the income of dividend]

So, from all angles, investors of the dividend stocks are the gainers, without any extra effort.

To go a step ahead, one can also reinvest the earnings from the dividend into the same stock (during the lower phase of the stock) and increase the income further.

In this article, let’s see, what the factors are; which need to be kept in mind while investing in dividend-paying stocks.

Consistency in Profits and Strong Cash Flow

The very first thing you need to look for is consistent profits. If a company isn’t making steady profits, there are fewer chances that it will be able to deliver dividends. The profitable growth of the company is the key indicator of a quality dividend-paying company.

Also make sure, that the company has sturdy cash flow generation. Because it is the cash flow that pays off the dividend.

For Example:

are considered good dividend-paying stocks as they not only pay dividends regularly, but dividend also grows with time. This is due to their regular strong cash flow.

Check Industry Strength

This is the most overlooked factor when choosing long-term dividend-paying stocks. If an industry has been touching the roofs for the past few years, it does not mean that the stocks won’t drop ever, but they’re likely to be more resilient than most stocks. And as long as the industry is in prosperous mode, there is more chance for a dividend increase, over the period.

In order to identify potentially good dividend-paying companies, do the following research

• Dig into the financial reports. Look for the profit and loss account of the company.
• Check, how much the Earning per share (EPS) of the company has grown in last 5 years.
• Check if dividend per share of the company has grown in last 5 years.
• Relate, if EPS growth and dividend per share growth are similar. If this is so; it is a good sign for you. Growth in EPS indicates that the net profit of the company is improving and Dividend per share growth mean that the company believes in idea of paying dividend to the investors. Therefore, having similar EPS and Dividend per share means, as the profits of the company upsurges in future, it will increase the dividend pay out to the investors.

Bottom Line

Dividends are long term investments. Dividend payment is a process by which company share its net profit with its stockholders. Good dividend paying companies are more likely to increase its profits over time. As the profits improve, dividend payment by the company also rises.

In 2019, some of the top dividend paying stock in India are:

1. Ingersoll Rand
2. Wall Street Fin
3. IOC 
4. National Steel and Agro Industries
5. 21st Cent Mgmt
6. Vedanta
7. Merck
8. Shervani Industries
9. Nalco
10. Polyplex Corp

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