🍫Power of Dividends

Giving a heads-up on what are dividends and how can they be a superpower!

Understanding Dividends

When you own a share of a company, you basically own a part of that company and if that company makes profits over a financial year, the company might decide to share its profits with its shareholders.

Voilà - That is termed dividends.

Google defines dividend: A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders.

For instance, Alphabet Inc. made a profit of $1 Billion dollars in a year and Google might decide to share that profit with its shareholders based on how many shares they hold.

So do all companies pay out dividends? The answer is a big NO. Any amount not distributed is taken to be re-invested in the business for their future prospects.

Companies like Apple, AT&T, ITC, TCS, Infosys have been paying out dividends over the years and you can probably expect them to pay out in the future. But there are high chances that they might not release dividends if they were not able to make profits over the year. So, it's completely dependent on the balance sheets of the company.

How to identify a good dividend-paying company?

Let's dive in deep into this with an example. Infosys paid a dividend of 15 INR per share in 2021 and ITC paid 5.75 INR per share in the same year. So obviously, Infosys paid a good dividend., isn't it?

No, don't move to a conclusion too quickly. Infosys's share price was around 1700 INR when it announced a dividend and ITC was ~210 INR. Let's assume you invest in 1700 INR in an Infosys's share and you will get 15 INR for that 1 share. But for that same 1700 INR, if you buy ITC shares, you can actually buy 8 shares for that price which translates to 48 INR in dividends.

1*1700 Infosys share = 8*210 ITC sahre

But, 15 INR for 1 share of Infosys < 5.75 INR for 8 shares of ITC

So, the lesson learned is - look at the return on investment (ROI) i.e. the dividend yield percentage rather than just the investment alone. Hence, invest in the long term and enjoy the fruit of free money as Dividends.

And 2 mins of silence for intra-day traders who can never imagine getting a dividend 😛

If you are unaware of what stocks provide a good dividend yield you can use the Dividend Stars smallcase or the Dividend Aristocrats smallcase.