High dividend stocks

What are High-Dividend Stocks?

High-dividend stocks are equity shares that offer investors a good amount of dividends in return for their capital. The companies these stocks represent are typically well-established corporations with sufficient cashflows and profitability, allowing them to reward their investors with consistent and high dividends in a financial year. Before we understand high-dividend stocks, let us look in-depth at the meaning and concept of dividends.

Dividends - Dividends represent the income investors receive on their invested capital in equities. It represents that portion of a company’s profit distributed among investors as a reward in the form of cash or additional shares. In India, dividends are usually paid quarterly or annually.

Another important point to note here is that companies don't need to offer dividends compulsorily, and it depends on the decision of the Board of Directors (BOD) and shareholders whether to pay dividends or not.

How to Identify High-Dividend Stocks?

Identifying high-dividend stocks can be challenging for many investors; however, they can use various dividend ratios and tools to find quality stocks that offer high dividends.

• Dividend ratios:

1. Dividend Yield Ratio - The dividend yield ratio is a key metric that measures the dividend paid relative to the stock price. It means that dividend yield represents the relationship between annual dividends and a company's current market price per share.
   
   Dividend Yield Formula = Annual Dividend per share/Market price per share
   
   For example, assume that Company Z paid an annual dividend per share of 50 rupees in the financial year 2023-24. The current market price per share is rupees 100. Hence, the resultant dividend yield will be (50/100)*100 = 50%.
   Interpretation - By looking at the value of the dividend yield ratio, you can conclude that the company is paying 50% of its market value per share as a dividend to its shareholders. However, it can sometimes provide a misleading interpretation because it is based on the current market price of shares, which fluctuates extensively in a given time frame.
2. Dividend Payout Ratio = Dividend payout ratio is another important measure that assists investors in analysing the rate of dividends paid by organisations as a part of their net earnings. It is a more precise ratio to measure a company’s ability to provide dividends relative to its net profits.
   
   Dividend Payout Formula = Dividends Paid / Net Earnings
   
   For example, Company Z paid total annual dividends in the financial year 2023-24 worth rupees 10,000. The net earnings of the company for the same period is rupees 2,00,000. Hence, the resultant dividend payout ratio will be (10,000/2,00,000)*100 = 5%
   Interpretation - From the value of the dividend payout ratio, you can conclude that the company is paying 5% of its annual net earnings as dividends to its shareholders in a year. The remaining 95% is retained to invest back into the company for future growth and expansion.

• Tools:

1. Stock Screeners - Investors who are not familiar with stock analysis and research methods and find ratios difficult to understand can use stock market screeners to identify high-dividend stocks. These screeners are dedicated tools that provide a list of high-dividend stocks in India.

How to Buy High Dividend Yield Stocks?

Investors must have a Demat account with an online brokerage company to buy high-dividend yield stocks. Follow the below steps to open a demat account:

Step 1 - Choose a suitable stock broking platform that offers trading facilities in the Indian stock market. Do thorough research about the right intermediary for investing in high-dividend stocks.

 Step 2 - Now register on the chosen platform with your mobile number or email ID and initiate the application process. 

Step 3 - Fill out the demat opening process by filling in your contact details and other necessary information as required in the application.

Step 4 - This is the verification step in which the necessary documents, like a PAN card, address proof, and other documents, are verified to authenticate your credentials.

Step 5 - This step opens the Demat account after an E-sign process between the brokerage and the investor.

Once all the information is verified and an E-sign of the agreement with the intermediary is done, the demat account is opened and is ready to use.

Benefits of Investing in High-Dividend Stocks?

First, the very evident reason for investing in high-dividend stocks is that they offer a steady income stream over the investment period. These stocks usually have a high-dividend payout and yield ratio, which indicates that a high-dividend stock pays consistent and good dividends.

Also, high-dividend yield stocks are backed by strong fundamentals such as positive cashflows and healthy profitability. Underlying companies of high-dividend yield stocks are very stable and market leaders in their industries, which can stabilise your portfolios.

Taxation on High-Dividend Stocks

Tax implications on high dividends have changed significantly since the enactment of the Finance Act 2020. Below are the tax implications for the high-dividend stocks in India:

• Before the Finance Act 2020

1. Income tax up to Rs 10 Lac was exempt under section 10(34), and the amount above Rs 10 Lac was taxable under section 15BBDA.
2. Before the Finance Act 2020, the dividends were taxable in the hands of the company that distributed the dividends. This tax was known as the Dividend distribution tax (DDT) levied @15%.

• After the Finance Act 2020

1. The liability to pay dividend tax was transferred to the hands of the recipient, and DDT was abolished. 
2. From the assessment year 2020-21, dividend income is taxable as per individuals' income tax slabs. 
3. The exemption limit for dividend tax was revised to Rs 5000 per year. This means annual dividend income above Rs 5000 is now taxable. 
4. Company offering dividends now deducts Tax Deducted at source (TDS) when the annual dividend exceeds Rs 5000.

Key Takeaways On High Dividend Stocks

• High-dividend stocks are equity shares of listed companies that give large amounts of dividends.
• High-dividend yield stocks have solid fundamentals and stable return generation capability.
• You can use dividend ratios and stock screeners to identify high-dividend stocks.
• You must open a demat account with a registered and trustworthy stock brokerage platform to benefit from high-dividend stocks.
• Dividend income is taxable as per the income tax slab of the recipient and is exempt up to the annual limit of Rs 5000.