Which are the top stocks with dividend yield above FD rate in India right now?
What is the dividend yield of a company and how is it calculated?
The dividend yield of a company is a financial ratio that measures the quantum of cash dividends paid out to shareholders relative to the market value per share.
It is calculated by dividing the annual dividend per share by the market price of the share.
Dividend Yield = 100% * (annual dividend per share/market price per share)
It is often expressed as a percentage of the market price of the share.
Here's an example...Suppose company X's stock price is Rs 300 and the company's dividend per share is Rs 10. Using the above formula, the dividend yield of a company is 3.3%.
This means that for every Rs 100 invested in the share, investors earn a dividend of Rs 3.3.
What kind of companies pay high dividends?
A company can do two things with the profits that it earns - It can either plough the profits back into the company for investing in capex, new products or distribution or pay out the amount as dividend and become a dividend stock.
As such, dividend payout depends a lot on the cash (after meeting its capital expenditure and working capital requirements) a company generates during a year.
Often companies do not need to reinvest into the business purely because they don't see the need for it.
A classic example would be of companies from the FMCG sector. The FMCG sector is a slow yet steady growing industry. But yet, companies choose to pay out huge dividends due to the sector's slow growing nature as capex requirements are on the lower side.
As against this commodity businesses like cement, steel, textile or even capital goods and telecom businesses need to constantly reinvest cash. This leaves very little on the table to pay to shareholders by way of dividends.
Is every high dividend yield company a good buy?
Absolutely not. Not all dividend stocks should be treated equally.
When identifying the right dividend stock to invest in, here's a few things to keep in mind...
A good dividend stock should be available at an attractive dividend yield. This does not mean the higher the yield, the better the stock. On the contrary, a higher yield can be a result of an extremely beaten down stock price.
But more importantly, a company with a high dividend yield should have good governance practices and must not have a history of ignoring the interest of minority shareholders.
Thus, along with the strong corporate governance, good growth prospects and a healthy dividend policy are crucial for investing well.