In the year 2008, I opened my first Demat account and I purchased some stocks. How I selected my stocks? You should never select stocks like how I did. I searched on google which stocks to buy and I stumbled upon one blog. That blog suggested a few stocks. I purchased 10 of each stock. I had no idea what stocks represented. I thought whatever I was buying was supposed to make me money by going up in price. I sold some stocks when they went up in price. That is an example of beginners’ luck, and some companies eventually went bust and the stocks disappeared from demat. Well, that was the beginning of a long journey. Eventually, I purchased stocks off profitable companies and started getting the dividend. In India till date, the dividend we earn is tax-free, because the companies pay dividend distribution tax. Now, I have done enough research to select stocks with dependable dividends.
So, How To Buy Dividend Stocks In India? First, you need to open a Demat account. Personally I can tell you sharekhan, Zerodha are good. Then stock selection is very important and that is the next step. Then all you will need to do is sit tight and watch the paint dry, as long as the business is great with a moat.
Zerodha is great because there is no brokerage. Sharekhan offers me a low brokerage charge because I have been their customer more over a decade now and I give them a good amount of business. I do not like ICICI Securities, it is really cluttered and not user-friendly.
Is investing in dividend stocks a good idea?
It depends. The idea is the businesses which are matured and do not know how to put all their cash flow to work, usually distributes the cash as dividend among shareholders. So, these are not fast-growing businesses. And they are not investing in expansion. But, paying dividends may show that the management is shareholder-friendly. If you are young and if you find a business that is growing fast and has a long runway, you can consider investing in that business instead of matured businesses where the business would not grow further. And if you have another source of stable cash flow each month, you do not need to depend on dividend income. So, there is no cookie-cutter approach. Check your situation and take a call.
Remember, dividend stocks come with a lot of risks and you may experience temporary loss in capital if you do not manage to capture absolute bottom price. So, consider that risk too, the stock price may dip, the company may suffer temporary setbacks. If you would like to see the stable principle, you should focus on fixed income options. But, in a low inflation environment, the fixed income instruments will not make you much money. On the other hand, a good business may be a good source of tax-free dividend yield.
Can you lose money on dividend stocks?
I will answer this question with 2 examples. Consider BP PLc, while that yields more than 6%, but the price of that stock was above $41, 6 months back, and now the stock is around $38. Now, BP is a solid business and it is not going anywhere anytime soon, but it is a great example that one can lose money on dividend stocks too. You cannot invest in dividend stocks for the short term. If you have enough money after having an emergency fund, you can invest that money. Ideally, you should contribute towards a retirement fund and then an emergency fund before you buy dividend stocks.
There is another stock Reliance Capital, the Anil Ambani enterprise which is a holding company of other debt-ridden ventures. The website of Reliance Capital is not updated for 2 years or so. This stock was above 150rs 6-8 months ago and now the stock is trading around 15rs per share. The book value eroded faster than hydrogen peroxide depletes. It was yielding around 10% but it has so much debt now, it has become difficult for this company to keep its nose above the water. And as a result, the subsidiaries are defaulting on the bonds one after another. I hope I made this clear by now that dividend yield is not a reliable parameter and can change fast based on company fundamentals.
How long do you have to hold stock to get the dividend?
In the USA you have to hold stock for at least 60 days. In India, you have to hold the stock right before the dividend finalization date. There is usually an announcement date when the AGM declares the dividend and then there is an effective date after that date shareholders get the dividend. As long as you are a shareholder before or on the announcement date, you should expect the dividend. After the effective date, you can expect the money to be credited in your bank account within a few days to 2 months.
Do you still get a dividend if you sell the stock?
I have received dividends a couple of times after selling the stock. There is a window after dividend effective date and when the money gets credited in your account, if you sell the stocks in between, you will still get the dividend.
Do stock prices go down when dividends are paid?
They might. The stock price might drop right after the company pays out cash from books as dividend to the shareholder, because the assets drop and potential capital appreciation goes out with that cash in form of a dividend, that causes a drop in the market capitalization of the business, hence the share price drops. But there is no hard and fast rule for it. The share price may or may not drop based on the market sentiment if people are ready to buy the stock and if they bid up the price of shares, then the price won’t drop.
Can you live off of dividends?
In the USA dividends are more stable, in India companies are known to maintain a payout ratio or dividend. India is a growth economy. companies are not matured, so most companies are still in the investment phase. And the incomes are not that stable. So, in India, you should not count dividends as a stable income source. But that is in 2019. This would change in the future.