Dividend stocks: An excellent source of passive income
Passive income allows an investor to live beyond the traditional means. Have you ever imagined living on a passive income? Well, it’s a possibility if one can plan their investment in a better way. There are various sources through which one can generate income apart from traditional jobs, such as rental income, freelancing, and part-time jobs. But one of the most common ways of generating passive income is through investment in dividend shares. Dividends completely fall into the passive income category. Historically, investors have found that dividend stocks are less riskier compared to other stocks. It is one of the best ways to increase your income for your retirement goals. But it is not easy to pick any dividend stocks, as many other things are taken into analysis before making any constructive decision. The key focus should be on picking the right dividend growth stocks and making their portfolio. Building a dividend portfolio is one of the hardest things to do. So, before that one needs to understand what is a dividend?
The dividend is a cash payment that is made by the company to shareholders as a reward for being shareholders. When a company generates earnings (I.e.- All revenues – All expenses) then those earnings can be turned into cash. This cash can be either reinvested into the business or paid out to shareholders. Before building a dividend stock portfolio, an investor should be aware about dividends.
- Regular Dividend: These are dividends that a company generally expects to pay consistently over time. Generally, almost most of the companies pay their dividend at regular intervals. They are paid once quarterly.
- Special Dividends: As the name suggests, it is mainly paid during special occasions. A company can decide to pay a special dividend after posting a few quarters of high profit.
There may be other reasons too such as the company has enough cash, which are beyond their operational expenses. It acts as a special message to the market, that they have enough cash and they have a dominant position in their respective domain.
To build a portfolio of dividend shares, one needs to first look at the process through which dividends are determined:
- A dividend by a company is determined through a dividend policy over time.
- It is mainly used to determine at what amount of certain income it will pay to the investor.
- For instance, A company may set a target of paying out 20% of the earnings, then after the quarterly report, they will multiply their earnings by 20% to determine how much to payout. But very few companies set a dividend-paying out ratio.
- Dividends are mainly declared and paid on a per-share basis. So, In case if a company wants to pay out 60 crores in dividends and it has 10 crores shares outstanding, then the dividend will be paid out as Rs 6 per share, or Rs 1.5 per share quarterly.
- An investor should always look out for the declaration date on which a company officially announces to make a dividend payment in the future. On the given payment date, the investor will receive the payment of their dividends in your brokerage account.
- But an investor should always be aware of the record date, the date at which he/she is eligible to receive the dividend payment.
But to make as a major source of passive income, then he/she should be careful in picking dividend stocks. Before selecting any dividend stock, one should watch out for :
- Historical dividends: An investor should look upon historical dividends, how it’s currently performing. If the performance is not up to your expectation, or quite below your expectation, then it’s better to avoid the risk.
- Strong Cash: It is one of the most important things to pick dividend cash. A high amount of cash tells us that the company is performing quite well and it can pay the dividend in the future.
- Low Debt: An investor should also look upon debt to equity ratio, it will provide information on its debt. If the debt to equity ratio is high, then it’s better to avoid the stock.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing