Guide to Dividend Investing: How to Profit from Rich Dividend Paying Stocks!

Dividend is your share of the annual or quarterly profits that a company has declared over a period of time. Dividends are regular payments made by companies to their shareholders and are considered tax-free in the hand of shareholders in India. When you purchase stocks for investment and are shareholder of a given company, the company can either pay part of their annual profits to you in the form of regular dividends, or the profits can be reinvested in the company’s business. Typically, it is seen that companies willing to share their profits with their shareholders do well over a period of time, as their stock gets good visibility among investors and is traded at good premium over other stocks.

For retail investors, studies have shown that holding good dividend paying company in your portfolio is a good strategy. Gains made by yearly or quarterly dividends slowly accumulate to a sizeable amount over the years. Investors can treat dividends as a source of income, or can even reinvest the dividend received to buy more shares in the given business. Hence investors can improve their ownership in the business and benefit significantly over a period of time.

For investors, there are a few dates you need to be aware of regarding dividends declarations.

Declaration date is the day when the Board of Directors make the decision and announcement of their intention to pay a dividend to the shareholders. On this declaration date, the Board will also announce the Record Date and payment date for the dividend.

Record date Shareholders who own the stock on or before this date are considered as registered to receive the dividend. Thus if you wish to benefit from the dividend payment, you need to purchase and hold the stock before the Record Date that is announced by the company.

Ex-dividend date is the date when stock is considered to be trading after the dividend has been paid. Existing holders will now receive the dividend payment, even if they sell the stock. New buyers post this date will not get the dividend. The stock price will roughly adjust for the payment of the dividend and reflect the outgo of cash from the company. However, the positive sentiment around the dividend payment activity, will soon allow the prices to recover, hence benefitting the stockholder.

Payment date is the actual day when the amount if transferred to your savings account linked to your trading or investment account. Typically, most companies in India now do a direct ECS credit to your savings account and only a handful of companies mail you the cheque for the dividend amount.

Two Key ratios that investors should be aware of are Dividend Payout Ratio and Dividend Yield.

Dividend Payout Ratio is the ratio of profits that company is paying out as dividends. Thus if a company is making Rs 50 crores of profits each year and pays out Rs 10 crore as dividend, than this company has Dividend Payout Ratio is 20%.

Dividend Yield is ratio of Dividend received by investor divided by Current Market Price of the Stock. i.e. if you are receiving Rs 5 as the total annual Dividend from a given company, whose stock price is at Rs 100, than Dividend Yield for this stock is 5%.

Companies with high Dividend Yield and High Dividend Payout Ratios are cash cows and are a source of good passive investment for a retail investor. We will now look at a few good stocks in Indian Markets whose Dividend Yield is as good as or even higher than Interest Rate received by your Bank Savings account.

SRF Ltd: SRF is a multi-business group, global entity with manufacturing plants in four countries and is market leader in most of its businesses in its home market in India. SRF is also the world's 2nd largest manufacturer of both the Nylon 6 tyre cord as well as the belting fabrics.

SRF began in 1970 when its parent company DCM decided to set up a separate entity to manufacture nylon tyre cord fibers. Over the years, the company expanded its product line in technical textiles and also diversified into other businesses like Chemicals, Packaging Films and Engineering Plastics. It’s one of the few manufacturing successes emerging out of India and is winning globally over the years.

In 2012, SRF has paid 120% of dividend on its face value, i.e. 12 Rs of dividend per stock of Face Value 10 and Market Value of Rs 224 currently. Hence the Dividend Yield stands at a good 5.35% return per annum.

REI Agro: REI Agro is India’s biggest Basmati rice processing and marketing firm, and is the biggest company in the whole world in this space. REI Agro has delivered bumper topline results of 1536 crores and 1508 crores in last two quarters, which is 50% higher than 1002 crores in Dec, 11 quarter. So the firm is clocking a revenue run-rate of 6000 crores annually and even today is available at total market cap of just about 980 crores.

REI Agro has come up with a bumper 50% dividend (on face value of stock) which is highest ever dividend payout for the firm. With Face Value of Rs 1, dividend is Rs 0.5 per share, and at market price of Rs 10.59, the Dividend Yield stands at a good 4.72% return per annum.

Shree Ganesh Jewellery House: Shree Ganesh Jewellery House Ltd. is a  10,000 Cr. turnover company and is a Govt. of India recognized '4 Star Export House'. The company is one of the leading manufacturers and exporters of handcrafted gold jewellery from India.

The firm is a deep value stock trading at a P/E ratio of just under 3, and has been declaring dividends consistently from past three years. The dividend declared for 2012 is at 60% of face value of Rs 10 per share. Thus, dividend per share is at Rs 6, and at current market price of Rs 120 per share, the dividend yield is at good 5% return per annum.

HCL Infosystems: HCL Infosystems is one the best Dividend paying stock on NSE and BSE. Sample this, in 2011, HCL Infosystems has paid dividend after each quarterly result – probably the only company to pay four dividends in one year. It has paid dividends to its stock holders three times a year from last eight years, every year. Not only this, HCL Infosystems is a regular dividend paying company from last 15 years. In 2012, HCL Infosystems has declared 100% dividend on its face value of Rs 2, hence total of 2 Rs dividend for the year. On a market price of Rs 38.75, the dividend yield is slightly better than 5% returns per annum for the investors.

Hence, investors should not only look at stocks for capital appreciation and quick gains, but should invest in high dividend yielding quality stocks to prepare a dividend portfolio which delivers risk free 5-6% gains on a yearly basis. This is not only comparable to keeping money in a savings account, but also provides you ownership of a good company and possibility of reaping capital gains when market sentiment improves and stock price appreciates. Till then, reap rich dividends from stocks with high dividend yields and payout ratios.