dividend income as a passive income

Should You Invest In High Dividend Paying Companies

What is a dividend?

The dividend is the part of the company’s profit that is distributed to shareholders. It is given as a reward to the shareholders for putting trust in the company. dividend income can be a great way to earn passive income. Distributing dividends is not mandatory for the company. The decision of giving dividends is purely management’s decision.

Should you invest in high dividend-paying stocks?

No, it is not always a wise choice to blindly pick the high dividend-paying stocks. Eps and other important fundamentals ratios should also be checked before buying the stock. If company A is giving a lot of dividends to its shareholders but doesn’t have good cash reserves. So, in such a case, the dividend income is not sustainable.

sometimes companies have huge debt on them but they keep paying dividends. Sometimes companies take on new debt, and a dearth of cash flow can put such companies in danger. Hence it is advised to investors to stay away from such companies

How do choose good dividend companies?

Blindly investing in high dividend-paying companies is definitely not a sign of a wise investor. But investing in good companies which have favorable long-term prospects is a good way to invest in the stocks. Following are the steps you need to check in order to invest in the best dividend-paying companies.

1. Check the dividend policy of the companies

Dividend yield= dividend per share/stock price

For example, if the ITC pays the 10 Rs dividend annually and its stock price is 250 then its dividend yield would be 4%. One can predict the future dividend by seeing the past track record of the company.

A giant conglomerate like ITC pays 50% of cash flow in the form of dividends. But on another hand, small-cap companies pay 0 or very less dividends.

If the company wants to grow fast, then it has a tendency to pay low or zero dividends.

2. Invest in a cash-rich company

If Eps growth of the company is good then it shows it has enough cash on its balance sheet. Which can use to pay dividends. The cash flow of the company is crucial to surviving unexpected events like the coronavirus pandemic.

Finding the cash-rich company’s current ratio is one of the best indicators. It is the ratio of assets and liabilities, greater than 1 is ideal.

3. Check the dividend payout ratio

Dividend Payout ratio = Dividend Paid / Net income

Some companies have a 0% dividend payout ratio which means they reinvest all money in the growth of the company like launching new products and or expanding the business.

While on the other hand, some companies have a 100% dividend payout ratio. It means they give back 100% of their earnings to the shareholders. Large companies tend to pay high dividends as they are mature in the industry. Hence they don’t need significant cash to run the company and its expenses.

Conclusion:

One should find the stocks which are giving decent dividends and have a strong growth outlook. So, they will get good dividend income and the value stock will also appreciate with time.

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