One of the Famous Investor and chairman at O’Shares Investments O’Leary said
“At the end of the day, dividends are the mother’s milk of investing”.
Dividend income is one of the best sources of passive income one could earn being in the capital market. There are two types of gains equity investors hope to earn from the stock. First is the capital appreciation i.e. increase in the stock prices and second is the dividend which comes as an added benefit to the stock. But not all stock gives dividends.
What is a Dividend?
A dividend is the profit of the company which is paid to the common shareholders of the company usually on a quarterly or yearly basis. Dividends are paid only after the board decided that it is the best use of the company’s profit and to make the stock attractive to investors.
There are four terminologies used in India in respect of dividends:
- Dividend Percentage
- Dividend Rate
- Dividend Payout Ratio
- Dividend Yield Ratio
Before diving in the names of the Highest Dividend Paying stocks in India, lets first go through some important pointers of dividends.
It is the basic term used in each and every dividend announced by the company. For Example, Recently one of my core-portfolio stocks Lupin has declared a dividend of 300%. Now at the first glance, 300% looks whopping but it is dividend percentage which is calculated on the face value which is just ₹ 2/-. Thus the actual dividend amount is ₹ 6/- per share of ₹ 900/-.
From the above example of Lupin, you must have understood what the dividend rate is. The dividend rate is expressed in amount and in some instances, the pay-out rate is also referred to as Dividend Pay-out. For example dividend of ₹ 1/- per quarter means quarterly dividend rate of ₹ 1/- and annual dividend rate of ₹ 4/-.
Dividend Payout Ratio
As the name says dividend payout ratio is the percentage of the dividend paid to the shareholders out of the earnings of the company. It is calculated by dividing the dividend per share by Earnings Per Share.
Dividend Pay-out Ratio = Dividend Per Share / Earnings Per Share
A higher dividend payout ratio means the company has less growth or reinvestment option. For example, if the earnings per share are ₹ 10/- per share and company announces ₹ 1/- dividend per share than the dividend pay-out ratio comes to 10% (₹ 1/- dividend / ₹ 10/- earnings per share).
Dividend Yield Ratio
The dividend Yield Ratio is above all other ratios and is the sole decision-maker when it comes to investing in stocks for dividends. The dividend yield ratio is calculated by Dividing the Dividend Per share by Current Market Price.
Dividend Yield Ratio = Dividend Per Share / Current Market Price
For example, if the current market price is ₹ 100/- and the dividend is announced ₹ 5/- then the dividend yield ratio comes to 5%.
What to look for? Best Dividend Yield or Best Dividend Amount
One should not think of dividends in rupee terms only. Always look for a better dividend yield than the dividend amount. For example, Stock A has a better dividend yield despite the lower dividend amount.
|Stock Name||Current Market Price||Dividend Amount||Dividend Yield|
|Stock A||₹ 100/-||₹ 10/-||10%|
|Stock B||₹ 1000/-||₹ 50/-||5/%|
Which dividend Paying you should avoid?
Avoid Companies with High Debt
The dividend is one of the best ways to attract investors, borrowing money, and paying out dividends in not uncommon. Thus avoid companies giving handsome dividends but piling up the debt.
Avoid Companies Inconsistent in Paying Dividends
Do not make investment decisions based on the current database. Look for the dividend pay-out history and compare it with the current pay-out. A high dividend yield stock is also not good if there is no growth and consistency in the dividends in the long term.
Avoid Companies paying dividends with a higher payout ratio
As a thumb rule dividend payout ratio should not be too high. Further, be cautious if the company’s payout ratio exceeds 65%-70%. Also, look out for the cash flow because the company may not be able to sustain the high dividend rate if the dividend rate exceeds the cash flow.
Avoid Companies with Weak Fundamentals
Companies having lack-luster yearly performance but paying high dividends should also be avoided because you may earn decent dividends on the one hand but there might be capital erosion on the other hand due to a decrease in the share price.
Highest Dividend Paying Stocks in India
Please find below the list of the highest dividend-paying stocks in India following the above rules. The list is sorted in descending order on the basis of Dividend Yield.
Taxation on the Dividend Income
Under the Recent Union Budget 2020, Government has abolished the Dividend Distribution Tax, and now the onus of paying tax on the dividend lies in the hands of the shareholders. Earlier, the liability of paying taxes on the dividend was on the company and dividend was announced after making provision of the taxes by the company. But after budget 2020, the taxes on the dividends shall be levied in the hands of the shareholders at the applicable tax rate of the respective individuals.
The new provisions will increase the dividend percentage but simultaneously increase the tax burden on the shareholder. Further, this will benefit taxpayers falling in the lowest tax bracket of 10% as the net cash flow in their will tend to increase whereas taxpayers falling in the 20% tax slab will have no major impact because the effective DDT was 20.56% (including surcharge and cess). But, taxpayers falling in the highest tax bracket of 30% will end up paying higher taxes.
Fixed Deposits Vs Dividend Income
In the Current scenario of declining interest rate, the current Fixed Deposit rates offered by most of the nationalized banks are in the range of 5.75% to 6.50% per annum. After considering taxes it further reduces to 5.25% to 5.85% (assuming the lowest tax slab of 10%).
As it says, “High-Risk High Reward”, with Fixed Deposits the chances of capital erosion are almost negligible while equity market investing would expose you to the risk of capital erosion. So your risk-appetite plays an important role in deciding whether to go for fixed deposits or for dividend income.