When the company makes a profit, it distributes a part of its earning among shareholders. Amount (percentage) and date of distribution is decided by the board of directors and paid to a class of its shareholders. The dividend is usually paid by cash (cheque or ECS), usually once in a financial year.
The most important factor in determining a dividend is company’s net profit. The company will earn a good profit if it is a dominant player in its sector or industry. And also if it has a durable competitive advantage, and is ahead of its peers.
Let us see which all companies will pay dividends and how to identify those companies. You can also make money in share market without investment.
There are certain characteristics that one should look for identifying dividend paying company. Let’s see them one by one.
- Free cash flow of the company
Total cash generated by the company, during a financial year is cash flow. After deducting all the expenses etc, the company is left with some cash. This cash is called free cash flow. The free cash flow by the company can be used to either expand its operation or pay dividends. After covering their future expenses. If some cash still remains then this cash is paid to shareholders as a dividend.
What should the dividend investor look for? He should look for cash flow history of 5 to 10 years. He should also see for its dividend per share for the same time duration. If both are rising at an almost same rate, then the investor should go for it.
- Dividend history of the company
Company paying an irregular dividend should not be trusted. Because one cannot be sure that it will pay a dividend in future or not. The company should have a long history of stable and regular dividend payment.
See the history of the company for last decade or so. Analyze the trend of dividend yield. It should be part of your portfolio if it has given stable or rising dividend yield. Dividend history can be seen at the website of all the stock exchange in India where you can invest your money.
- Debt of the company
The company borrows money from market or bank for its expansion or other business needs. Many companies have huge borrowing on their books. This borrowed payment sometimes is very high and takes away a huge part of profits. If profits are decreased then it is not possible for the company to pay a dividend. It is in the interest of investors to avoid these companies.
A slight increase in interest rates will decrease/wipe out company’s profit. Even if the board of directors of the company wishes to give a dividend. They cannot give, because of the shortage of funds.
Not only in share market but also commodities trading companies can be considered on same lines. Commodity trading tips for beginners can be had from agents/brokers of commodity exchanges.
See to it that your portfolio is diversified across sectors. This reduces the risk, as some sector performs best and some perform worst, at a given period of time.
One should never over-exposure the investment in only one company and one sector only. Some sectors perform contradictory to each other. Like when share market is on high ROI path, gold is at low ROI path, and vice versa.
Plan for dividend income should be made during working years as it needs time to grow. Patience, research, and regular investment help you achieve your targets.
Dividend income is one of the best passive sources of income. It provides the investor with regular and steady cash flow when other sources of income are dried up. It can be a source of regular income during retired life. One can see forward to rich, wealthy and worry-free life.