We all tend to invest in companies which are earning good profits and have a good future earning potential but how many of us tend to care about what the company tends to do with these profits. Very few retail investors tend to look into whether the company intends to re-invest the past profits or does it tend to distribute this profit among the shareholders as dividends.
Some analysts prefer high dividend paying companies and other analysts prefer companies which tend to re-invest the profit and pay lower dividends. In this article, we try to highlight the benefits of investing in High- Dividend paying companies considering the current economic situation.
Benefit of Investing in High Dividend paying companies
Uncertain future Economic Situation
With the Stock Markets meandering, investors could be hard-pressed to find growth stocks. There is not too much of good news flowing in either. Inflation is still worrisome and, therefore, the markets are expected to stay range bound, or even inch down, in the next few months.
In such times, it is always advisable to go for companies with a high dividend yield, as they tend to provide a cushion during periods of downturn. As the economic scenario still looks gloomy, it would be better to opt for companies paying higher dividends rather than companies which tend to re-invest the profits as the future is still uncertain.
Improves Cash Flows
You might be investing for capital appreciation, but receiving a handsome dividend once in a while helps you build up your own cash flows. In fact, good dividend paying companies should form the core of long term investor’s winning strategy in the Stock Markets.
This is because every year as the Dividends increase so does the investors cash flow. Dividend is the best way in which an investor can par take of the profits of the company. And companies that generate good cash flows often reward shareholders with good dividends. As profits and cash flows of the companies increase over the years, dividends too tend to rise, and an investor too makes a good bit of money from dividends alone.
Tax Free Income
As per Section 10(34) of the Income Tax Act of 1961, the Dividend paid by Companies is exempt in the hands of the Investor and is thus the Investor is not liable to pay any taxes on the Income from Dividends.
Companies with High Dividend Yield
Following are some of the companies paying a high dividend yield. The Figures have been computed taking into account the share prices as on 11th September 2011.
How to Choose Good Dividend paying companies
While investing in high dividend paying companies, you should always be wary of companies that offer irresistible dividend yields. Often investors see high dividends in the pink papers and rush to purchase the stock only to find that the company has discontinued its dividend payout or reduced it considerably.
While selecting good dividend paying companies for Investment keep in mind the following points:
Opt for companies with Good Dividend Paying Track Record
It is highly advisable for an investor to opt for companies that have a good dividend paying track record. A company which has consistently increased its dividend payout is your best bet. Companies in consumer businesses that require less capital are often the ones that tend to pay high dividends to the shareholders.
Good Dividend Yield
Looking for companies with a good dividend yield is also a way to dig for value stocks. They are often trading at such low PE multiples that any downside is limited. And if you hold these stocks long enough, at some time or the other, the investors will start moving in and you would be able to unlock significantly higher valuations. However, sometimes the investors might have to wait long enough for that to happen.
Companies in the process of Announcing Dividends
If quick cash flows are what you are seeking, always look for companies who have not currently paid out dividends as they would be in the process of paying announcing dividends and you would be able to receive dividends within a short period of investing in the company.
It is also advisable to keep an eye on the record dates for dividend payouts. If your company is paying a windfall dividend, the stock price often adjusts to take this dividend payout into account by correcting a little. But that should not be too much of a cause of worry for investors holding good dividend payout companies in the long run.
Summary
Opting for High-Dividend Paying Companies or Low Dividend Paying Companies is always a matter of personal opinion as both have their plus and minuses. If you have risk appetite, Low Dividend Paying Companies are suitable for you as they would be reinvesting the profits to earn more returns, and if you have a low risk appetite – High Dividend Paying Companies are better suitable for your profile as the profits earned are distributed among the shareholders rather than being reinvested which decreases the risk associated with the Stock.
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