Dividend investing can be a good strategy for some investors. That’s because dividend stocks provide two sources of return: regular dividend payments and capital appreciation of the stock price. However, it’s essential to begin by determining your investment goals and assessing your risk tolerance. If you are in need of regular passive income, then it would be wise to stick with dividend-paying companies. Otherwise, sticking to growing companies should be your strategy. Dividend payments are taxable at applicable slab rates and not guaranteed to equity shareholders. While investing in dividend stocks, it is important to research companies, analyze key metrics, and diversify your portfolio.
While investing in dividend stocks, it is important to research companies, analyze key metrics, and diversify your portfolio.
Key metrics you should consider before building a dividend-based portfolio:
▪️ Look for companies that have a history of paying consistent dividends over a period of time. Companies that consistently pay dividends even during economic downturns are typically good dividend-paying stocks.
▪️ Check the dividend yield: The dividend yield is the annual dividend payment divided by the stock price. Look for stocks with a higher dividend yield, but be careful of stocks with an abnormally high yield.
▪️ Check the pay out ratio: The pay out ratio is the percentage of earnings that are paid out as dividends. A lower pay out ratio indicates that the company has more room to increase dividends in the future. High retention may signify further investment into the business and confidence of the management in future business prospects
▪️ Consider the industry and sector: Different industries and sectors have different dividend payout patterns. For example, utility, consumer staples, PSUs etc are companies known for paying high dividends, while technology companies typically pay lower dividends.
▪️ Look at the company’s financial health: A company with a strong balance sheet, healthy cash flow, and consistent earnings growth is likelier to maintain or increase its dividend payments over time.
▪️ Research the company’s management: Look for companies with experienced management teams with a track record of making good financial decisions and maintaining a strong dividend policy.
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