Which Stock is Best For Dividends?

The best dividend stocks are those from companies that consistently share profits with their investors. To find good dividend-paying stocks, focus on companies with a long history of stable or growing profits. Look for stocks with a high dividend yield and a proven track record of paying dividends over many years. For example, companies like ITC and Hindustan Unilever (HUL) are known for reliable dividend payments. It is also important to check if the company has low debt and steady cash flow. These two factors supports consistent dividend payments.Topics:Q1: What are shares and dividends? Do companies give you a monthly income when you buy a share?Shares represent ownership in a company. When you buy a share, you become a part-owner of that business.Dividends are a portion of the company’s profit that is shared with shareholders.However, companies do not pay dividends monthly. In India, most companies pay dividends once or twice a year. Some might pay quarterly, but regular monthly dividends are rare. For example, if you own shares of a company like ITC, you might get dividends once or twice annually, depending on their profit and board decision. So, while it’s possible to get income from dividends, it won’t be monthly.For example:The above table shows that companies have different dividend payment patterns. For example, Finolex Industries pays dividends once every September. AMARA RAJA also pays annually but with varying months, August in 2022 and 2024, and December in 2023. Aurobindo Pharma, on the other hand, paid dividends twice in 2023, with one payment in March and another in December.This highlights that dividend payments can vary in frequency and timing across companies.Q2: Can I buy dividend paying stocks? What are the benefits?Yes, we can buy dividend-paying stocks. The main benefit of investing in dividend paying stocks are the following:Regular Income: One can earn regular income in the form of dividends. It is like receiving a bonus for owning the stock. Dividends can be a steady source of income, especially during times when stock prices aren’t rising.Safe Investments: Dividend-paying stocks often belong to well-established and financially stable companies. This is what makes them a safer investment. For example, companies like Reliance Industries and TCS pay dividends regularly. These regular payouts are like extra income for the shareholders over and above the share price growth.Reinvestment & Compounding: Over time, reinvesting these dividends can also help us grow our wealth. Suppose there is a company that has paid regular dividends since last 3 years. The accumulated dividend amount let’s say is Rs.5,000. We can use this amount to buy more shares of this company. As a result, it will fetch is evert more dividends as our shareholding will rise. Nevertheless, good companies also increase their dividend payouts over time.Q3. Does every stock give a dividend?No, not every stock gives a dividend. Some companies, especially newer or fast-growing ones, prefer to reinvest their profits back into the business instead of paying dividends. This helps them grow faster and expand. For example, a tech company like Zomato might not pay dividends because it’s focused on growth.On the other hand, mature companies like TCS or HDFC Bank often pay dividends. They do so because they have steady profits in the first place. Moreover, they also want to reward their shareholders. These companies don’t need to reinvest all their profits, so they share some with investors.Good smaller companies also wants to reward their shareholders, but their immediate need for cash is too high. They need cash to avoid debt, avoid costly capital raising to fund their capex needs.The focus of smaller companies is future growth, hence they may strategically decide to negative the dividend-need of their shareholders. They will do it to give a more healthy future price-growth to their shareholders.On the other hand, mature companies are generally too big. For them, even to grow at 5-6% CAGR, their need for capital is too high. For some companies, their industry may also be saturated (for now). Hence, for them it is better to distribute their profits to shareholders as dividends. This will keep the shareholders glued to their shares and they will not sell.Q4. Which company gives us good dividends?SizeCompany NameIndustryPrice (Rs.)Market Cap (Rs.Cr.)Dividend Yield (TTM)Large CapInfosysIT1950807,4222.0%Large CapITCStaples497.45622,6283.0%Large CapHCL TechIT1878.8508,3473.0%PSUONGCOil & Gas283.3356,5254.0%PSUPower GridUtilities332.1308,9203.0%PSUCoal IndiaMetals & Min496.45306,1035.0%PSUIOCLOil & Gas169.25238,9037.0%Large CapHindustan ZincMetals & Min517.1218,4707.0%Large CapTata SteelMetals & Min155.71194,3932.0%Large CapVedantaMetals & Min491.45182,5029.0%Large CapTech MahindraIT1672.6163,6192.0%PSUPower FinanceFinancials477.7157,5964.0%PSUBPCLOil & Gas350.7152,2389.0%PSUREC LtdFinancials551.7145,2633.0%BankBank of BarodaFinancials243.1125,7313.0%Large CapHero MotoCorpAuto & Anc5431.75108,5593.0%BankCanara BankFinancials104.0994,4623.0%PSUHPCLOil & Gas431.491,7846.0%PSUOil IndiaOil & Gas540.587,8293.0%BankUnion BankFinancials112.6186,0213.0%BankIndian BankFinancials527.371,0252.0%PSUGICFinancials396.5569,5883.0%PSUNMDCMetals & Min231.167,7533.0%PSUNMDC LtdMetals & Min231.167,7533.0%Large CapMphasisIT2900.654,8752.0%Mid CapPetronet LNGOil & Gas356.6553,5203.0%BankBank of IndiaFinancials104.4147,5343.0%Mid CapNippon Life AMCFinancials720.0545,7102.0%Mid CapICICI SecuritiesFinancials856.4527,8223.0%Small CapAster DMHealthcare427.521,28228.0%Small CapUTI AMCFinancials1284.2516,3984.0%Mid CapSanofi IndiaHealthcare678515,6342.0%PSURites LtdIndustrials311.0514,9375.0%Small CapRitesIndustrials311.0514,9375.0%PSUChennai Petro.Oil & Gas888.913,2376.0%Small CapP&G HealthHealthcare5241.28,7185.0%BankUjjivan SFBFinancials39.517,6494.0%Small CapVST IndustriesStaples371.056,3104.0%Small CapPTC IndiaDiscretionary189.235,6014.0%Small CapD B CorpTele & Media311.15,5245.0%PSUBalmer LawrieIT249.44,2633.0%Small CapIndian MetalsMetals & Min7283,9284.0%Small CapNirlonBuild Mate419.93,7846.0%Small CapJagran PrakashanTele & Media922,0025.0%PSUBalmer Lawrie (Invest)Financials83.251,8475.0%Small CapXchanging SolIT1161,29416.0%Small CapOriental CarbonAgri & Chem277.452775.0%Q5. How do I invest in dividend-paying stocks?Start by identifying companies with a strong history of paying dividends. One such list I’ve provided in the above section of this post. Alternatively, my Stock Engine also has a pre-built screener that can filter good long-term dividend paying stocks.Here is a quick process of how to filter dividend-paying stocks:Look for companies that have been paying and increasing dividends consistently over the years.Check the dividend yield, which shows how much dividend you get compared to the stock price. A good range is often between 3% to 6%.Next, ensure the company has a stable business, low debt, and strong cash flow. These parameters enable companies to continue paying dividends in the future as well.Quick Tip: Companies in sectors like utilities or FMCG (like ITC) tend to be more reliable dividend payers.Once you’ve shortlisted stocks, you can buy them the same way you would buy any other stock.Special Note: Dividend yield is often too low in the initial years of investment. The idea behind dividend focused investing is not to make big bucks from today. Focus on long-term holding to benefit from regular dividends. How? For good companies, dividend yield grows with time. Moreover, dividend reinvestment will further fetch more dividend income leading to compounding of wealth.Q6. How do I find “safe” dividend-paying stocks?To find “safe” dividend-paying stocks, we can follow these steps:Look for companies with a long history of paying dividends: Choose companies that have been paying dividends consistently for many years, ideally 5 years or more. This shows they are reliable. For example, companies like SBI, HDFC Bank, TCS, Tata Steel etc have a strong track record of consistent payouts.Check the company’s dividend growth: Safe companies not only pay dividends regularly but also increase the amount over time. A growing dividend indicates the company is financially healthy and committed to rewarding shareholders.Evaluate the payout ratio: This is the percentage of the company’s profit used to pay dividends. A payout ratio between 40% to 60% is generally safe. Too high (above 80%) could mean the company is paying too much of its profit, leaving little for growth. Moreover, such payouts are also rarely sustainable.Look for strong cash flow: Companies that generate steady cash flow are more likely to pay dividends regularly. Businesses with stable earnings, like those in utilities, FMCG, Healthcare, etc sectors, tend to have reliable cash flow.Check debt levels: Avoid companies with high debt. Too much debt can strain a company’s finances, making it harder to pay dividends. A company with low or manageable debt is safer. High debt companies often play safe by retaining their profits. It is their way to keep a provision for debt-repayment in case tough times are ahead.Focus on essential industries: Companies in sectors like healthcare, utilities, or consumer staples tend to be safer dividend payers because they offer products people need, even during tough economic times. Such companies have predictable cash-inflows hence their dividend payout are more consistent.By following these steps, we can identify companies that are more likely to provide consistent and safe dividend income.7. What is the meaning of a 500% dividend of a stock?A 500% dividend does not refer to the dividend yield. Dividend yield typically ranges between 0-5% for most Indian companies. It is calculated as a percentage of the stock’s current market price.For example, if a stock costs Rs.1000 and pays Rs.50 in dividends, the yield is 5%.However, when a company declares a 500% dividend, this is based on the face value of the stock, not its market price. Read more about ‘face value’ here. You will get a very clear idea of this metric.The face value is the original value of the share. It is often set at Rs.10 for many Indian companies. So, a 500% dividend means the company is paying 5 times the face value as a dividend. For a share with a face value of Rs.10, a 500% dividend means Rs.50 is paid as a dividend.If the market price of this stock is say Rs.1000 per share, then at a dividend payout of Rs.50 per share, its dividend yield will be 5% only. 8. How do I know if a company will pay dividends before buying their shares on the stocks a few weeks earlier?To know if a company will pay dividends before buying their shares, check the company’s dividend announcement. Companies usually announce dividend payments in advance, along with important dates like the record date and ex-dividend date.The record date is the cutoff day when you must be a shareholder to receive the dividend.The ex-dividend date is usually one or two days before the record date.You can find these announcements on the company’s website, stock exchange websites (like NSE or BSE), or financial news platforms (like think link of moneycontrol).For example, if Infosys announces a dividend with an ex-dividend date of November 15, you need to own the shares before that date to be eligible for the payout.By regularly checking these announcements, you can plan your purchases ahead of time to qualify for the dividend.9. If a company is paying a good dividend, can we conclude that it is a good company to buy shares of?To answer this question, we’ll consider three typical situations.Consistent Dividend Payer: A company that has been paying dividends regularly for the last 10 years is likely to continue doing so. However, future dividends still depend on the company’s financial health and their capital needs. For example, ITC has a strong history of regular dividends, but its future payouts will still depend on earnings and business conditions.Irregular Dividend Payer: A company that has not paid dividends consistently in the past is less reliable. Future dividend payouts from such companies will remain uncertain. For instance, some new tech companies may pay a dividend one year but skip it the next, depending on their growth strategy.Deteriorating Financials: If a company has paid dividends before but its financial performance is weakening, future dividends will be uncertain. A company struggling with losses or debt might cut dividends to conserve cash. For example, if a company’s profits drop sharply, they may choose to stop paying dividends to focus on recovery.While a good dividend payout is attractive, it’s important to consider the company’s long-term financial health and dividend history before making a decision.10. What is the downside of investing in dividend-paying stocks?These companies may offer slower growth compared to others. Companies that pay regular dividends often reinvest less of their profits into expanding the business. This can limit the potential rise in stock price over time.For example, an established company like ITC may provide steady dividends, but it might not grow as fast as newer, high-growth companies. As news companies retain most of their profits, they use the retained money to fund their expansion and modernization projects. This helps them to grow faster in times to come.Another risk is that dividends are not guaranteed.If the company faces financial troubles, it may reduce or stop paying dividends. Also, focusing too much on dividends can lead to ignoring important factors like the company’s overall financial health or market conditions.