Dividends are payments that companies make to their shareholders from their profits. They are a way of rewarding investors for holding their shares and providing them with a regular income stream. The financial stability and potential growth of a corporation may both be well predicted by dividends.
Stocks or mutual funds that concentrate on dividend-paying firms are good options for investors seeking significant dividend income. In addition to describing how to spot them, this essay will go into the benefits and risks of investing in high dividend-paying stocks and mutual funds.
What are high dividend paying stocks?
High dividend paying stocks are stocks of companies that pay higher dividends than the average of their industry or the market. These companies usually have a history of consistent and increasing dividend payments, and a strong cash flow position that allows them to sustain their dividends.
The following factors can be used by investors to identify firms with high dividend yields.
- Dividend yield: Below is a chart showing the current share price to yearly dividend per share. It indicates how much income an investor can earn from holding a stock for a year. A higher dividend yield means a higher dividend income relative to the share price. Dividend yield shouldn’t be the only factor considered when choosing a stock, though, since it can also signal a low share price resulting from subpar performance or unfavourable market circumstances.
- Dividend payout ratio: This is the proportion of earnings to yearly dividend per share. It displays the percentage of earnings allocated to shareholders as dividends. A lower dividend payout ratio indicates that the firm is keeping more earnings for reinvestment and growth, as opposed to a higher dividend payout ratio, which indicates that the company is delivering more earnings to shareholders. A moderate dividend payout ratio of 40% to 60% is generally considered ideal, as it balances between growth and income.
- Dividend growth rate: This represents the dividend per share’s yearly percentage change. It indicates how fast the company is increasing its dividends over time. A business that is more eager to distribute more of its income to shareholders and has a greater dividend growth rate is one that is more certain of its future profits and profitability. A consistent and positive dividend growth rate is preferable, as it shows that the company can maintain or increase its dividends even in challenging market conditions.
Utilities, energy, consumer staples, financials, real estate, and telecommunications are a few industries that frequently have high dividend paying equities. These industries frequently have predictable and steady revenue flows, little capital investment needs, and strong entry barriers, all of which allow them to provide shareholders with regular and sizable dividend payments.
Some examples of high dividend paying stocks in India are:
| Stock | Dividend Yield | Dividend Payout Ratio | Dividend Growth Rate |
|---|---|---|---|
| Coal India Ltd | 8.67% | 117.65% | 9.09% |
| Power Finance Corporation Ltd | 7.63% | 52.94% | 4.17% |
| Hindustan Petroleum Corporation Ltd | 6.97% | 58.82% | 25% |
| Indian Oil Corporation Ltd | 6.95% | 48.28% | -16.67% |
| REC Ltd | 6.88% | 51.72% | -4.35% |
Also Read – Mutual Fund SIP: Here are the top 5 mutual funds for SIP of 3 to 5 years
What are high dividend paying mutual funds?
High dividend paying mutual funds are funds that invest in companies that pay higher dividends and have a history of doing so. Mutual funds with an emphasis on high dividend-paying stocks include the following:
- Dividend yield funds: These are equity funds that place at least 65% of their capital in shares of companies that pay out large dividends. They aim to provide regular income and capital appreciation to investors by investing in companies that have strong fundamentals and cash flows, and pay consistent and increasing dividends.
- Equity income funds: These are equity funds that put at least 65% of their money into dividend-paying stocks. They aim to provide steady income and moderate growth to investors by investing in companies that have mature businesses, stable earnings, and pay out a large portion of their profits as dividends.
- Hybrid funds: invest in a combination of equity and debt securities in variable quantities based on their risk-return profile. They aim to provide balanced returns and income to investors by investing in both growth-oriented and income-oriented securities.
The following are some advantages of investing in mutual funds that provide large dividends:
- Tax efficiency: Contrary to dividends from equities, which are subject to tax deducted at source (TDS) at 10% if they exceed Rs. 5,000 in a financial year, income from mutual funds are tax-free in the hands of investors.
- Diversification: Investing in high dividend paying mutual funds provides exposure to a diversified portfolio of dividend-paying companies across sectors and market capitalisations, which reduces the risk of concentration and volatility.
- Professional management: Investing in high dividend paying mutual funds allows investors to benefit from the expertise and research of the fund managers, who select the best dividend-paying stocks based on various parameters and market conditions.
Investing in mutual funds that provide significant dividends has several risks, including:
- Market risk: When you invest in high yield mutual funds, you expose yourself to the volatile and uncertain equity markets. The performance of the underlying shares influences how well the funds perform, which is influenced by a range of factors such as market circumstances, business performance, economic conditions, competition, and regulations.
- Interest rate risk: Investing in high dividend paying mutual funds also involves exposure to debt markets, which are subject to changes in interest rates. With changes in interest rates, the value of the debt instruments owned by the funds might alter in an inverse manner. A rise in interest rates can reduce the value of the debt instruments and the NAV of the funds.
- Dividend risk: Investing in high dividend paying mutual funds does not guarantee a fixed or regular dividend income, as dividends are declared at the discretion of the companies and depend on their profitability and cash flow situation. The dividend yield and payout ratio of the companies can also vary over time depending on their growth prospects and capital requirements.
Some examples of high dividend paying mutual funds in India are:
| Fund Name | Category | Dividend Yield | Dividend Payout Ratio | Dividend Growth Rate |
|---|---|---|---|---|
| ICICI Prudential Dividend Yield Equity Fund | Dividend Yield Fund | 2.54% | 35.71% | 11.11% |
| Aditya Birla Sun Life Dividend Yield Fund | Dividend Yield Fund | 2.38% | 34.78% | 0% |
| UTI Dividend Yield Fund | Dividend Yield Fund | 2.32% | 33.33% | -16.67% |
| HDFC Equity Income Fund | Equity Income Fund | 1.94% | 28.57% | -25% |
| Franklin India Equity Income Fund | Equity Income Fund | 1.87% | 27.59% | -20% |
| ICICI Prudential Equity & Debt Fund | Hybrid Fund (Aggressive) | 1.66% | 24.44% | -33.33% |
| HDFC Hybrid Equity Fund | Hybrid Fund (Aggressive) | 1.63% | 24.07% | -25% |
| SBI Equity Hybrid Fund | Hybrid Fund (Aggressive) | 1.61% | 23.81% | -20% |
FAQ
Q: How can I find high dividend paying stocks and mutual funds?
A: You can use various online platforms and tools to screen and compare high dividend paying stocks and mutual funds based on various parameters such as dividend yield, dividend payout ratio, dividend growth rate, performance, risk, etc. Some of the popular platforms are Moneycontrol.com, Screener.in, Valueresearchonline.com, etc.
Q: What are the advantages of investing in high dividend pay stocks and mutual funds?
A: Some of the advantages are:
- Regular income: Investing in high dividend paying stocks and mutual funds provides a steady source of income to investors, which can be used for meeting expenses or reinvesting for compounding returns.
- Capital appreciation: Because dividends are a reliable measure of a company’s financial health and growth potential, investing in high dividend-paying companies and mutual funds delivers the added benefit of long-term capital gain.
- Tax efficiency: Investing in high dividend paying mutual funds is tax-efficient, as dividends received from mutual funds are tax-free in the hands of investors.
Q: What are the disadvantages of investing in high dividend paying stocks and mutual funds?
A: Some of the disadvantages are:
- Market risk: Investing in high dividend paying stocks and mutual funds involves exposure to equity markets, which are subject to fluctuations and uncertainties. How effectively the funds perform is determined by the performance of the underlying shares, which is influenced by a number of factors such as market circumstances, business performance, economic conditions, competition, and regulations.
- Interest rate risk: Investing in high dividend paying mutual funds also involves exposure to debt markets, which are subject to changes in interest rates. With changes in interest rates, the value of the debt instruments owned by the funds might alter in an inverse manner. A rise in interest rates can reduce the value of the debt instruments and the NAV of the funds.
- Dividend risk: Investing in high dividend paying stocks and mutual funds does not guarantee a fixed or regular dividend income, as dividends are declared at the discretion of the companies and depend on their profitability and
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Also Read –
- ELSS Mutual Funds – What is ELSS Funds & How to Invest in India
- Mutual Fund SIP: Here are the top 5 mutual funds for SIP of 3 to 5 years
DISCLAIMER – Stock Market Investment are subject to market risks, read all scheme related documents carefully before investing