Of late, when market is going at nice pace and it is really difficult to pick good individual stocks at fare price, we came across something very fascinating for retail investors. Yes the Dividend part of stocks.
What is dividend of a stock?
As you all know that a stock is a share of company ownership, when you own a company you are liable to bear loss/profit of company performances.
When a company makes profit, it has two options to do with it. Either it can use the profit to expand it business/reserves or it can distribute that profit among the owners. When companies choose to distribute the profit among its eligible owners, it is termed as dividend.
What's the theory?
Our dividend theory says that if you hold consistent dividend paying stocks for some n number of years, it actually payback you the entire initial investment cost, Plus the price appreciation is your wealth and all these are absolutely tax free*. So these kind of dividend paying stocks can easily replace your existing FD's and all earning of which is liable to taxman.
Do we have such great companies in Indian market? What about crashes like 2008 or depression like 2013?
Absolutely Yes, we do have many such profitable companies in Indian stock market. though nothing is crash proof but if you would have hold these stocks consistently in thick and thin, it would have made things simpler. Let's test this theory with a test case study.
Let's go back exactly 15 Years ago, i.e, on 23/08/2001. (This will cover 2008 and 2013 as well)
I am picking up Axis Bank. (You can choose any of the consistent dividend paying stocks).
So, the price of Axis bank, exactly 15 years before was Rs. 35 (Face Value: 10).
Now let's see what was the dividend paid by axis bank to its shareholders over the last 15 years.
Year Dividend 2002 2 2003 2.2 2004 2.5 2005 2.8 2006 3.5 2007 4.5 2008 6 2009 10 2010 12 2011 14 2012 16 2013 18 2014 20 2015 23^ 2016 25^ Total 161.5
As it is evident here, in case of 15 years, the dividend paid by Axis bank for one Rs. 35 share is almost 5 times the initial investment. You can try this with other number of stocks as well which pays consistent dividend, all it can very for each one is number of years it take to repay your initial investment ranging from 12 - 16 years for the majority of the profitable companies.
Now what about your wealth, Let's test that as well.Taking into consideration that we are talking about retail investors, let's put Rs. 1000 into axis bank at same time as mentioned above.
No. of shares Split
28
140 (1:5)
So you would have 140 shares of axis bank as of now and the current price per share is Rs. 582.
Roughly, 140*582 = 81480. Plus dividend of almost. 4522. Which makes a total of Rs. 86002.
Rs. 1000 had turned into 85000, with your investment cost reducing to Nil in process.
That's the power of dividend paying stocks. Amid all the chaos and trouble which happened many times in Indian stock market in last 15 years.
Hope you like the dividend theory, we will try to publish list of some of the most consistent dividend paying stocks in market soon.
Keep investing,
BeginnersClub
*A company does pay Dividend distribution tax on your behalf, but you as an owner of share receives it tax free, also the gain made by stocks is tax free is you hold it for more than 12 months.
^ Axis bank share got split from old face value of Rs. 10 to New face value of Rs. 2, the dividend are adjusted accordingly.