How to make 1 Lakh in Dividends: As we grow older, our investment strategies change from the regular “Get Rich Quick” schemes to consistent value investing. In the stock market, you can either make returns through capital appreciation of equity or through dividends. Listed companies that have been profitable declare dividends every year or every quarter.
Every year at the Annual General Meeting (AGM), a listed company decides the dividend to be issued to shareholders to enjoy the profits of that year. Instead of trading stocks over the capital difference, you can also hold onto those stocks to receive dividends.
This method of investing in dividend-paying stocks is called dividend investing. This article discusses How to make 1 Lakh in Dividends, Continue reading to learn more.
How to make 1 Lakh in Dividends?
Firstly, you should take a look at the historical dividend patterns of the companies you want to invest in. Remember that your money will not double or triple overnight and earning dividends is a matter of patience.
Some of the high-paying dividend stocks in India are –
|Company (Stock)||Dividend Yield (%)||CMP ( In Rs.)|
|Power Fin Corporation||10.99||109.45|
Source – Screener.in
The above list represents the stocks with the highest dividend yield as of 2022. The dividend yield represents the dividend issued on each share that is generated purely through the profits of the company.
A simple formula to explain dividend yield = Dividend per share / Price per share
To understand it a bit better, let’s use the data from the above table for PNB Gilts.
The current market price of PNB Gilts is ~ Rs. 65 per share. With a dividend yield of 15.38%, each share generates Rs.9.99 in dividends. So to earn Rs. 1 lakh only through dividends, you would have to buy 1,00,000 shares. ( CMP of Rs. 64.95 with a yield of 15.38%). This amounts to a whopping Rs. 65,00,000.
In such situations, value investing and fundamental analysis take hold. Realistically, it is ill-advised to invest huge amounts into one stock. The risk factor is high and your portfolio is completely dependent on one company’s performance. Value investing allows you to identify fundamentally strong stocks that are undervalued so that over time they multiply in value and in earnings. That way, you can
- Invest in undervalued stocks and
- Diversify your portfolio into different stocks and sectors.
One major advantage of dividend investing is that over time, the profits of the company grow exponentially over a longer period. Traditional saving techniques such as a fixed deposit or recurring deposit give lesser returns than capital appreciation or even dividend investing over a thirty-year period. As the revenue of a company grows, so do the profits and therefore they could pay better dividends in the future.
Dividends are not Obligatory
One important fact that new investors tend to overlook is that dividends are not obligations. The decision to issue dividends is completely voluntary and optional by the board of directors.
There will be years when companies will endure losses as well or wish to diversify their revenue to new projects which cost capital. In such cases, dividends will most likely not be issued to shareholders.
Another important note is the growth of dividend-paying companies. While it is a positive sign when the board of directors decides to pay dividends, there is less capital left to reinvest and grow the company.
If a company issues 70% or more of its profits in dividends, then there are lesser funds for expansion. So in the consequent years, investors should expect a decrease in dividends.
Dividend investing is a good opportunity for long-term gains. If implemented right, it could give a regular passive income. We hope you’ve gained some knowledge from the article “How to make 1 Lakh in Dividends”. Do check out the blog section for more information. Happy Investing!
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