Return on equity consists of two parts: an increase in the stock price and dividend returns. Dividends are payments that businesses make to shareholders; they are a way for the investor to share profits made by the business. Dividend investing allows the investor to receive a regular source of income or create wealth by reinvesting the payouts.
Dividend Investing: A Few Advantages
Dividend investing involves creating a Diversified Portfolio of stocks of companies that pay or can pay dividends regularly over the long term. Dividends are a significant indicator of the value of a stock. A consistent increase in dividend payout is an indicator of a well-managed business whose earnings are growing steadily. Dividend investing has the following benefits:
1. Earn profits without selling stocks
Most often, the only way to make profits on shares is to sell them. Dividend investing allows the investor to earn profits on equity without the need to relinquish ownership.
2. Capital preservation
Companies that pay dividends regularly are more stable and better managed than non-dividend-paying businesses. These stocks perform better during a downturn, particularly when a value approach with a margin of safety is used to pick stocks.
3. Passive income
Dividends provide a regular income stream which the investor can choose to reinvest or spend. Dividend investing is a good approach for those looking for additional income.
4. Hedge against inflation
The income stream on fixed-income investments does not grow with time. Inflation reduces the actual returns on fixed-income products. Dividend investing gives an option to receive income that increases with time and maintains the purchasing power of the principal and income.
How to choose the right stocks for dividend investing?
Dividend investors can choose one of the following approaches; choose companies with high dividend yields or those with a high dividend growth rate.
The high dividend yield approach focuses on companies growing at a slow pace and having high cash flows. These companies pay high dividends to their shareholders.
In the high dividend growth rate approach, the focus is on companies that pay low dividends but are proliferating. The investor is buying profitable stocks at competitive prices with the potential to earn big in the coming years.
The strategy an investor chooses to pick dividend stocks will depend on what their requirements and goals are. Investors looking for stable returns to supplement their income prefer stocks with high dividend yields.
Investors may find it overwhelming to choose stocks, as sifting through so much data can be a challenge. Picking the right script for investment can also be confusing, as the investor is unsure which aspect to focus on and what to ignore. With so many online portals, there is no scarcity of information; however, how to use the information without the right expertise poses a challenge. Investors may also find it tricky to track stocks.
Teji Mandi | Smallcases offers investors expertise backed by research to create a customised portfolio. A smallcase is a basket of stocks that reflect an idea, in this case, dividends. Smallcase Dividends Portfolio helps investors invest in stocks that pay high dividends.
To sum it up
Investments in equity help in wealth creation over the long run. Picking the right stocks can also provide the investor with a regular and stable stream of income. Smallcase dividends portfolio is a collection of high dividend-paying stocks chosen by SEBI licensed professionals; just the right pick for those looking to supplement their income.