Life is all about balancing game and investing can’t be an exception to this rule. A savvy equity investor would know that the stock price of a company may rise or fall irrespective of its finances. It’s not advisable for a retail investor to take an aggressive stance. And you should not try to ride the market trend for maximizing your capital return. Even if you are somehow succeeding in riding market trend at the right time, you may lose your entire gains. This all happens in a matter of a few trading sessions if market sentiment changes all of a sudden. In this context your Dividend Income is a big plus for you.
Being a prudent investor, you’re likely to single out a fundamentally good trending stocks that can give you a handsome return. Additionally you can earn extra reward termed as dividend from the company for the risks you have taken. You don’t have to worry whether the stock price falls or rise as speculated. You will remain in peace of mind by receiving some extra cash at the end of the year.
What’s more, dividend income is fully tax-free in some countries. And additionally if the trending stock price rises in a bull market, you can get lucrative return on your investment should you sell all your stock holding ex-dividend (after receiving your extra cash at year-end). And the capital gain tax on your sold out shares may be waived in some countries or minimum in most of the countries, if the holding period of stock is more than one year.
Wait, that’s not all. Dividend payout by all fundamentally good companies grows in proportionate to the growth in their net profit. It means that if you stay invested, your such income will keep growing year after year in a compounded fashion. If you think that the return on your capital is nominal compared to your investment, just be patient and watch out for future years. One innovative strategy that you could incorporate in buying your dividend paying stocks is well explained in a highly regarded book “Dividend Growth Investing Using Elliott Waves” written by a well known EWP practitioner Ramki N Ramakrishan. This is one of the safest way to stay invested in high quality dividend paying and make you damn rich. You should read this amazing book if you truly interested in dividend paying stocks and getting your investment multiplied.
Let’s say, dividend payout of your invested company grows @20% year-on-year, in 10 years time period your such income can grow by more than 6X and in 20 years it will be approximately 40 times. Wow! What a nice return, isn’t it? And if you consider the occasional windfall such as bonus or right issues, your dividend income goes up in a geometric fashion over a longer period. Now, what are the best dividend paying stocks? Well, to make it simple, just Google it and bingo!
Let’s assume, in one of the highest paying dividend stock with the highest dividend yield is 2% and your investment is $10,000, then your income will be $200 in the first year. Not sound good, right? But if you’re patient enough, and your dividend paying stock grows @ 20%. In 20 years your annual extra income will grow $8000 every year. On top of it, your capital will keep appreciating year after year. So, your company’s dividend payout could be your long-term cash machine.
To qualify a company to be a good dividend-paying stock, its five year average return on capital employed(RoCE) need to be at least 15%, five-year average debt-to-equity ratio should be less than 1.5, P/E(Price to Earning) Ratio should be below 15%, the ratio of cash flow from operations to cash profit in the past five year should not be less than 60% and the company’s net sales, operating profit and dividend payout must have a CAGR of 15% in the past five years.