The

DEFINITE
Guide to
DIVIDEND
INVESTING
(Everything you need to know to get
started with dividend stocks)
THE DEFINITE GUIDE TO
DIVIDEND INVESTING
B y F i n G ra d

General Disclaimer
The information contained in this book is for educational
purpose only. There is no recommendation or advise for buying
or selling any types of stocks or making investment decisions.
Readers are advised to do their own research or take the help
of their financial advisor before investing.

This document contains personal ideas and opinions of the

author. We have done our best to ensure that the information
published in this book is accurate and provide useful valuable
information. However, because we do not create data, we shall
not be held liable or responsible for any errors or omissions in
this book or for any damage you may suffer as a result of failing
to seek competent financial advice from a professional who is
familiar with your situation. Use this book at your own risk.

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1
THE DEFINITE GUIDE TO
DIVIDEND INVESTING

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 TABLE OF CONTENTS
Chapter 1 What is dividend investing ? 5

Key terms related to

Chapter 2 dividends that you should know. 8

Chapter 3 Who is eligible to get dividends. 10

Chapter 4 How to make money from dividends? 13

Case study: Making money from

Chapter 5 17
dividends.

Chapter 6 Pros and cons of dividend investing. 23

How to use dividend yield to find

Chapter 7 27
undervalued stocks?

How to use dividend yield to find

Chapter 8 32
undervalued stocks?

When should you sell your dividend

Chapter 9 41
stock?

Chapter 10 Closing Thoughts 43

3
 CHAPTER 1
What is
DIVIDEND INVESTING?
Do you know the only thing that
gives me pleasure? It’s to see my
dividends coming in.

– John D Rockefeller

Whenever a company makes a profit from its business, it has a few options. Either the company
can distribute the profits with its shareholders or re-invest that money back in its business for
future growth opportunities like buying new machines/equipment, opening a new plant,
expanding to new cities, acquiring new companies etc.

In most common practice, a company can share a portion of its net profit with the shareholders
and retain the remaining for its growth. This profit that the company shares with its shareholders
is called dividends.

In other words, dividends are the corporate earnings that companies

distribute to their shareholders to reward them.
For example, in the financial year ending Mar 2022, Vedanta paid Dividends amounting to
Rs 45 per share to its shareholders. Therefore, if you were holding 100 shares of Vedanta in your
stock portfolio in 2022, you would have received Rs 4500 as dividends, credited directly into your
bank account.

Adj. Dividends per share

Name 2019 2020 2021 2022
2018
Vedanta ₹21.22 ₹18.86 ₹3.9 ₹9.51 ₹45.03
NMDC ₹4.64 ₹5.77 ₹5.53 ₹7.76 ₹14.74
REC Ltd ₹6.86 ₹8.25 ₹8.25 ₹9.53 ₹0
Power Finance ₹7.8 ₹0 ₹9.5 ₹10 ₹0
HUDCO ₹0.55 ₹0.55 ₹0.83 ₹3.1 ₹2.18
ONGC ₹6.73 ₹7 ₹5 ₹3.6 ₹10.5
GAIL ₹4.68 ₹4.13 ₹6.59 ₹5.07 ₹9.12
Coal India ₹16.62 ₹13.1 ₹12 ₹16 ₹17
Hinduja Global ₹4.98 ₹4.99 ₹9.99 ₹19.98 ₹0
RITES ₹4.58 ₹10.61 ₹16.65 ₹13 ₹17
4
Why do some companies give dividends
and others don’t?
In general, fast growing companies don’t give much dividends to their shareholders as they
need the money for their expansion. And it makes sense too. Growing companies require capital
to launch new products, open new offices, hire more employees etc. And if they reinvest their
money efficiently, these small growing companies can turn into mid-cap or large cap and can
add more value to their customers.

On the other hand, large matured companies who have been into market for many years and
are financially strong, do not need much money to grow. Hence, they distribute a large portion
of their profits as dividends to their loyal shareholders who have been on their side for a long time.

What is DIVIDEND INVESTING?

Dividend investing is a popular buy-and-hold investment
strategy of purchasing stocks that issue regular and high
dividends to their shareholders in an effort to build a
steady stream of passive income.

Here, the investors do not worry about selling their stocks

to make money as they are able to generate regular
income through dividends.

In other words, dividend investors are more interested

in purchasing these stocks for long-term. The consistent
dividends can help them in building a secondary source
of income or a passive stream for their retirement or
long-term goals/needs. Further, as you can guess, such
investors are not at all interested in investing in companies
which do not give any dividend.

Overall, a dividend-focused portfolio can provide a significant regular stream of income for
theinvestors along with building a compelling long-term nest egg. All thanks to the power of
compounded gains.

5
Why dividends matter for the INVESTORS?
Dividends are one of the most debatable topics while picking a stock.
While many investors consider regular dividends as a healthy sign for
a company, on the other hand, many thinks that giving high
dividends can be counter-productive for a company.

Anyways, dividend investing has its own pros and for many
investors ‘dividends matter a lot’.

For example, suppose you are a long-term investor. You have

invested in the stocks of a company for the next 15-20 years. Now,
if the company does not give any dividends, there is no way for you to make money
until you sell those stocks. And while selling these stocks, you may reduce your
long-term nest egg.

On the other hand, if the company gives a regular dividend, say 3% a year, then this can be a
source of regular income for you. Here, you do not have to sell your stocks to get returns.
Moreover, depending on the size of nest and expected dividends, an investor can plan their
expenditure.

Further, most investors consider a regular dividend as a sign of a healthy company.

A company which has given a consistent (moreover increasing) dividend for last ten consecutive
years, can be considered a financially strong company. On the contrary, the companies that give
irregular dividends or cuts dividends in harsh economic conditions/recessions cannot be
considered as financially healthy as the previous one.

This is because dividends are big commitments by a company and are considered as a promise
to their shareholders. When a company’s management pays a regular dividend to its
shareholders, this shows the confidence of the company towards its business & future
performance.

Overall, dividend matters for a lot of investors as it is a powerful sign of an efficient management
and good financial health of the company.

6
 CHAPTER 2
Key terms related to DIVIDENDS
Before we continue our discussion on dividend investing, let’s first discuss a few of the frequently
used terms related to dividends that we are going to use in the upcoming modules in this book.

Here are a few key terms that every dividend investor should know:

Dividends:
These are the corporate earnings that companies share with their shareholders to reward them.

Usually, a company may distribute dividends two times in a year via annual and interim
dividends. The amount of dividend is decided by the board of directors of a company and
announced to the shareholders through a corporate announcement. Once the dividends are
distributed, it gets directly credited to the shareholders account.

Dividend %:
This is the ratio of the dividend given by the company to the face value of the share.

Note: Face value (also known as par value) is the value of a company listed in its books and
share certificate. The company decides the face value when it offers shares at the time of
issuance. The face value of a share is fixed (until the company decides to split or reverse-split
the shares).

For example, if the dividend per share of a company in a year is Rs 20 and face value of the stock
is Rs 10, then the dividend% is 200%.

Dividend % is used to compare the dividends distributed by the company over the years as face
value is generally constant, unlike the share price of a company.

Dividend yield
The dividend yield is the ratio of dividend per share and the current share price of a company.
It indicates how much a company pays out in dividends each year relative to its share price.

8
 Dividend per share
Dividend yield =
Price per share

For example, if the company distributed a dividend of Rs 20 per share and its current share price
is Rs 800, then the dividend yield is equal to 20/800 = 2.5%.

Dividend Payout ratio

The dividend payout ratio is the amount of dividends paid to shareholders relative to the net
income of a company.

Here, the amount that is not paid out as dividends to shareholders and is held by the company
is called retained earnings.

Dividend payout ratio can be calculated as:

Dividends
Dividend payout ratio =
Net Income

OR
Dividends per share
Dividend payout ratio =
Earnings per share

For example, if the dividend per share is Rs 4 and the earnings per share is Rs 20 for a company,
then its dividend payout ratio is equal to 20%.

These are the key terms that you should know for now. We’ll introduce more terms as we
progress further in this book.

9
 CHAPTER 3
Who is eligible to get DIVIDENDS?
Shares are consistently bought and sold among the investors. And hence, one of the most
obvious questions among the investors is “If I buy a stock today and sell it after two days, will I be
eligible to get the dividends? And what about the previous investor or the next investor who buys
the stock from me?” Who is actually eligible to get dividends?

We are going to discuss this topic and answer who is eligible to get dividends and who is not.

Who gets the dividend?

The timing of buying a stock is the most important factor for
receiving dividends. If you want to receive the dividends of a
company, you must buy and hold it for the correct time.

In simple words, if you buy the dividend stock after a certain

date announced by the company, the previous seller will
get the dividends as he/she was holding the stock when
the company was recording the name of the shareholder
in their record books for the distribution of dividends.

Therefore, it’s very important that you monitor the dates

during the corporate announcement by the company’s board
of directors. It’s during these press conference (corporate
announcements) when the company announces how much
dividends they will be giving to the shareholders (per share), the date when the shareholders
will receive their dividends and other important details.

Understanding the dates mentioned in the corporate announcement is very important for the
investors as it decides the timing of buying these dividend stocks. Now, let us discuss these
dates so that you can understand who is eligible to get dividends.

10
 4

Must Know Dividend Dates for

INVESTORS.
There are four important dates related to dividends that every investor should know. They are:
Dividend Declaration Date, Record Date, Ex-Dividend Date & Payment Date.

Among all four, understanding the Ex-Dividend date is of uttermost importance. You will learn the
significance of this date as you read this module further. For now, let’s understand all of these
dates one by one.

Dividend Declaration Date :

This is the date on which the company’s board of directors declares the dividends
for the shareholders. The declaration includes the date of dividend distribution, size
of the dividend and the record date.

Record Date :
On the dividend declaration date, the company announces the record date. The
record date is the date on which your name should be present on the company’s
list of shareholders i.e. record book, to get the dividend.

Shareholders who are ‘not’ registered on the company’s record book as of this date
will not receive the dividend. According to the company, you are only eligible to get
the dividends, if your name is on their book on the record date.

Ex-Dividend Date :
The Ex-dividend date is usually two days before the record date. In order to be able
to get the dividend, you have to purchase the stock before the ex-dividend date. If
you buy the stock on or after the ex-dividend date, then you won’t receive the
dividend. Instead, the previous seller from whom you bought the stock will get that
dividend. Let’s understand it further.

After a company sets the date of record, the ex-dividend date is set by the exchange.
The two days before the record date is used by the stock exchange to settle all the
transactions and send the name of the registered shareholders to the company.
The investors who buy the stock on or after the ex-dividend date won’t be listed in
the record book of the company. So, if you purchase a stock on or after the
ex-dividend date, you won’t receive the dividend.

11
Dividend Declaration Date :
This is the date set by the company for the dividends to be paid to the shareholders. Only those
shareholders who bought the stock before the ex-dividend date are entitled to get the dividend.

Note: All these dates matter a lot for the first-time investors. However, if you are holding the stock
for a long time, you don’t have to worry about these dates. The dividends will automatically get
credited in your account on the payment dates.

By now, we hope you have understood all the important dividend dates. As already mentioned
earlier, the Ex-dividend date is the most important date among all. Anyways, let’s quickly
summarize all the dividend dates here:

Types Declaration Ex-Dividend Record Payment

Date Date Date Date

The date by which your

The date before which
The date on which name must be on the The date when the
Notes dividend is announced
you must own the stock
to be entitled to the
company's record dividend is paid to
by the company. books as a shareholder shareholders.
dividend.
to receive the dividend.

Now, let us give you an example of the company’s board of director’s press conference so that
you get a better understanding of the above dividend dates.

Coal India Ltd :

In May 2022, Coal India Limited (CIL) board had announced ₹3 final dividend for the financial
year 2021-22 and 12th August 2022 was fixed as record date for dividend payment.

https://www.livemint.com/market/stock-market-news/coal-india-shares-climb-to-52-week-high-
as-stock-trades-ex-dividend-today-11660202243694.html

The ex-dividend date would be 11th march, 2017 i.e. those investors who bought the stock of
Hindustan zinc before the 11th Match will be entitled to receive the dividend.

12
Summary:
In this module, we discussed the important dates related to dividends and understood why
youneed to buy the stock before its ex-dividend date if you want to be eligible to receive
dividends.

If you want to know the dates of the upcoming dividends payment date by a company, you can
refer their official website, stock exchange websites (NSE/BSE) or financial websites like
Money control, Yahoo Finance etc.

13
 CHAPTER 4
How to make money from DIVIDENDS?
Everyone who enters the stock market wants to make money from their investments. And in
order to do so, first, they need to understand how people really make money from stocks. There
are two ways to make money from the stock market: 1) Capital appreciation and
2) Making money from dividends.

When it comes to capital appreciation, most of the people know this method to make money
from stocks. “Buy low and sell high”. Purchase a good stock at a low valuation and wait until the
price goes up. The difference in the purchase and selling price is the profit or capital appreciation.

This is the core principle of value investing. Finding an amazing stock at a cheap valuation and
holding it for a long time until the market realizes its true/real value.

However, there is also a second method to make money from socks which is generally ignored
by most newbie investors. It is called dividends. In this module, we are going to discuss how to
make money from dividends, the right way.

Important terms to know regarding dividends:

Dividends:
These are the profits that a company shares with its shareholders as decided by the
board of directors.

Dividend yield:
Dividend yield is the ratio of annual dividend per share divided by the price per
share. The formula for calculating dividend yield is:

Dividend per share

Dividend yield =
Price per share

14
For example, if a company gives an annual dividend of Rs 10 and its current market price is
Rs 200, the dividend yield of the company will be 10/200 = 5%.

Now, here are the annual dividends given by a few famous companies in India for the financial
year 2022.
• Vedanta - Rs 45 per share
• REC - Rs 12.21 per share
• Hinduja Global - Rs. 217 per share
• Coal India - Rs 17.5 per share
• ONGC - Rs 9.01 per share

Now, if you calculate the dividend yield given by the above companies, you may find it very little.
For example, the dividend yield of Reliance stands at 0.30 today in 2022. And for many other
companies, the yield is even lower.

Anyways, if a company gives a dividend yield of 2% per year, it’s really difficult to make a
livelihood using this income, right? For example, if you want an annual income of Rs 2 lakhs by
dividends, then you have to invest over Rs 1 Crore in the stock which gives 2% dividend yield. This
is not a feasible method to make income for most average Indian investors.

However, there’s an important lesson that you need to learn here:

Dividends grow over time…

This means that a fundamentally strong company will increase
its dividends with time.

For example, if a healthy company gives a dividend of Rs

10 this year and makes more profit in upcoming years,
then it will increase its dividends in future. Maybe it will
give a dividend of Rs 10.5 per share next year or more.

Therefore, if you look at the dividend yield,

the numerator (dividends) is going to increase
over time. But the denominator (purchase price
of the stock) is going to remain constant for you.
In short, the dividend yield for that stock is going to
increase in future, if it is a good dividend company.

15
Let us understand this better with the help of an example.

How To Make Money From DIVIDENDS?

Suppose you purchased 100 stocks of a company at Rs 200. The annual dividend for that year
was Rs 10. So, for the first year, the dividend yield will be 5%. This yield is small compared to the
returns from most of the debt investments.

Nevertheless, let us assume that the company is fundamentally healthy and going to consistently
increase dividends in the upcoming years. Here is a table describing the annual dividends in the
upcoming years.

Purchase Dividend Total Annual

Dividend
Price Yield Dividends

YEAR 1 ₹10 ₹200 5% ₹1,000

YEAR 2 ₹12 ₹200 6% ₹1,200
YEAR 3 ₹15 ₹200 7.5% ₹1,500
YEAR 4 ₹18 ₹200 9% ₹1,800
YEAR 5 ₹21 ₹200 10.5% ₹2,100

From the above table, you can notice how dividend yield and the total annual dividend received
by you will increase over years.

Moreover, along with the dividends, your invested capital will also appreciate in value as you are
holding the stock for a longer duration. In the next 5 years, maybe the purchase price of Rs 200
has now appreciated to Rs 400, 500 or whatever higher price.

16
For the investors, who buy that stock directly in the fifth year (at an appreciated price- let’s say
Rs 500), the dividend yield for them might be low (Rs 21/Rs 500). However, as you have
purchased that stock long ago at a decent price, the dividend yield will be quite high for you
compared to the original purchase price, even higher than many other high investment options.

In short, dividends helps to make money from your investment and receive a healthy income
without selling your original assets.

Summary:
Buy low and sell high is not the only way to make money from the stocks. There are many
long-term investors who are generating big wealth through their annual dividends.

If you want a good consistent return on your stocks without selling it, then investing in healthy
dividend stocks can be a good strategy.

17
 CHAPTER 5
CASE STUDY: How long term investors
make money from dividends?
We’ll discuss the case study of two of the biggest IT companies in India: WIPRO and INFOSYS in
order to understand how dividends (along with bonuses and stock splits) can create wonders
for the long-term investors.

But before we dig deeper into the case studies, let us first understand what is a bonus share and
stock split.

What is a BONUS SHARE?

Bonus shares are the additional shares given to the
shareholders by the company and is a method
of rewarding the loyal shareholders

If a company announces 1:1 bonus share,

it means that forevery one share that you
are holding, you will get one additional share.
Therefore, if you have 35 shares of that company,
your total number of holding shares after the bonus will be 70.

But how do company give bonus shares? The answer is simple. Companies accumulate its
profits in the reserve fund. During bonus share, these reserve funds are converted into share
capital and distributed among its shareholders as bonuses. In short, when a company gives
bonus shares, it’s share capital increases while its reserve fund decreases.

Now, the next question is why do a company give bonus shares? Here are the few reasons why:

For rewarding its shareholders

To improve the liquidity and the total trading volume of the stock
To decrease the share price and to make it more affordable for retail investors.

It increases the confidence of the shareholders towards the company.

Although a bonus share is a positive news for the shareholders, however, it doesn’t affect their
investment amount. After the bonus is given, the share price of the company falls in the same
proportion. Therefore, there will be no noticeable difference in the wealth of the shareholder.
18
What is a STOCK SPLIT?
In a stock split, the company splits the share price into different parts.

For example, if the current share price of a company is Rs 1000 and it announces a stock split of
1:1, the share price will reduce to Rs 500. All the existing shareholders will get an additional stock
to compensate with the split. As a reference, you can consider the share split as a big pizza
dividing into different pieces.

The fundamentals of a company remain the same after a stock split. There is neither increase or
decrease in the share capital or reserve in a stock split. However, it increases the liquidity of the
stock and increases the trading volume. Further, a split also makes the stock more affordable for
the retail investors.

Time and again, a company offers share bonuses and splits depending on their preferences.

Case Study 1: WIPRO

WIPRO is an Indian information technology
giant company owned by Azim Premji group.

Assume you bought 100 shares of WIPRO in

1990. At that time, the face value of one stock
of WIPRO was Rs 10. For simplicity, we are considering
that you bought the stocks at the face value. Hence, your
initial investment would have been Rs 1,000.

Since 1990, WIPRO has given seven bonuses to its shareholders and one stock split (till 2017).
Let’s also assume that you are a long-term investor and didn’t touch the stock after buying.
This means that you didn’t sell any of your stock since purchase and avoided making any profit
booking.

Now, let us analyze how the total number of your holding shares of WIPRO would have grown
after the bonuses and stock split for past 27 years.

1990: 100 shares

1992: 200 shares (1:1 bonus on 12-08-1992)
1995: 400 shares (1:1 bonus on 24-02-1995)
1997: 1,200 shares (2:1 bonus on 20-10-1997)

19
 1999: 6,000 shares (5:1 split on 27-09-1999)
2004: 18,000 shares (2:1 bonus on 25-06-2004)
2005: 36,000 shares (1:1 bonus on 22-08-2005)
2010: 60,000 shares (2:3 bonus on 15-06-2010)
2017: 1,20,000 shares (1:1 bonus on 13-06-2017)
2019: 1,60,000 shares

(Source: Money Control)

In short, 100 shares of WIPRO bought in 1990 would have turned out to be 1,20,000 shares by 2017.

Capital Appreciation:
Let’s find out the current worth of the 100 shares that you bought in 1990. As of 1st August 2022,
the market price of one share of Wipro is Rs 410.65

Total Number of share= 1,60,000

Net Value = Rs 410.65 * 1,60,000 = Rs 6,57,04,000.

Your small investment in the 100 shares of WIPRO in 1990 would have turned out to be an
appreciated value worth over Rs 6.57 crores in the next 32 years

Don’t forget the DIVIDENDS...

In the last 27 years, WIPRO has given a decent annual dividend to its shareholders. However, here
weare just considering the dividends for the last four years. Annual dividend per share
(non-adjusted) by WIPRO for last 4 years:

2019: Rs 1 2020: Rs 1
2021: Rs 1 2022: Rs 1

Annual dividend received by the shareholders can be calculated using this formula:

Annual Dividend
received
Dividends
= per share * Total No.
of shares

20
Assuming that you bought 100 shares of WIPRO in 1990, here are the annual dividends that you
would have received in different years depending on the number of shares you were holding in
that year:

Dividends (2020) = Rs 1 * 1,60,000 = Rs 1,60,000

Dividends (2021) = Rs 1 * 1,60,000 = Rs 1,60,000
And Dividends (2022) = Rs 1 * 1,60,000 = Rs 1,60,000

Moreover, for the year 2017, the total number of shares in your portfolio would have turned out to
be 1,20,000.

Dividends (2017) = Rs 4 * 1,20,000 = Rs 4,80,000

Overall, you would have received dividends worth Rs 4.8 lakhs in just an year by literally doing
nothing through your dividends.

The BEST part...

Even if you don’t sell your stocks, you are holding a total of 1,20,000 shares in your portfolio and
hence are eligible to get dividends on all those shares.

Moreover, dividends increase over time. If the company announces a bigger dividend next year,
you will receive even a bigger passive income through dividends. In addition, if the company
announces more bonuses in future, even your grandchildren lives will be secured :) (kidding!!).

Case Study 2: INFOSYS

Have you ever considered getting a

deposit of Rs 13,08,672 per year to your
bank account by doing nothing? Yeah.
It’s possible. And in this case study,
we’ll discuss how a long-term investor can earn over Rs 13,08,672 per year just by
purchasing good stocks at a decent price and holding it for a very long-time horizon.

21
INFOSYS History
Infosys became public in February 1993 and started issuing its shares at Rs 95 per share. Since
then, this company has given seven bonuses and one stock split. In simple words, it means that
if you had bought 100 shares of Infosys in 1993, today you would own 51,200 shares. Now, let us
analyze its bonuses & splits for the last 25 years:

1993: 100 shares

1994: 200 shares (1:1 bonus on 30/06/1994)
1997: 400 shares (1:1 bonus on 18/06/1997)
1999: 800 shares (1:1 bonus on 25/01/1999)
1999: 1,600 shares (2:1 split on 30/11/1999)
2004: 6,400 shares (3:1 bonus on 13/4/2004)
2006: 12,800 shares (1:1 bonus on 14/4/2006)
2014: 25,600 shares (1:1 bonus on 10/10/2014)
2015: 51,200 shares (1:1 bonus on 24/4/2015)
2018: 102,400 shares (1:1 bonus)

Net Appreciated Worth = Rs. 1489*102,400 = Rs. 15,24,73,600

Capital Appreciation
Suppose you purchased 100 shares in 1993. Your initial investment would have cost you:

100 shares x Rs 95 = Rs 9,500.

Today, the market price of one share of Infosys is Rs 1,181 and you would be holding a total of
51,200 shares of Infosys.

Net Appreciated Worth = Rs 1,181 * 51,200 = Rs 6,04,77,200

As of today, your small investment of Rs 9,500 would be worth over Rs 6.04 Crores.

Again, don’t forget the DIVIDENDS…

In the last 25 years, Infosys has given decent dividends to its shareholders. For simplicity, let’s
calculate the dividends earned for the last two years only. For the last two years, here are the
annual dividends are given by Infosys to its shareholders:

Dividends (2020): Rs 18.50 Dividends (2022): Rs 30

Dividends (2021): Rs 21.50
22
Assuming that you bought 100 shares of Infosys in 1993, it would have turned out to be 102,400
shares by now. Let us calculate the annual dividends.

Dividend (2021) = Rs 21.5 * 102,400 = Rs 22,01,600

Dividend (2022) = Rs 30 * 102,400 = Rs 30,72,600

In short, you would have received dividends worth Rs 13,08,672 in just an year.

The BEST part:

Even if you do not sell your shares, you can enjoy the dividends for the rest of your life. Plus
capital appreciation on your assets too. After all, the share prices of a fundamentally strong
company will go higher in future.

CONCLUSION: Invest for the long-term

These two case studies are typical examples to show the power of holding good stocks for long
term. Besides Infosys and WIPRO, there are a number of good stocks in the Indian share market
which has given even better returns to its shareholder for over decades.

23
 CHAPTER 6
PROS and CONS of dividend
investing.
Dividend investing is one of the most popular ways
to generate income from stocks. Here, the investors
enjoy the benefits of dividend income along with
capital appreciation.
Moreover, when invested correctly, investors can earn
amazing income through dividends. However, no
investment strategy is perfect and there are a
few shortcomings of dividend
investing too.
We are going to discuss the pros and cons of
dividend investing that you should know before
making your investment in dividend stocks.

Pros of investing in Dividend Stocks:

Let’s start with the pros. Here are a few best advantages of investing in dividend stocks:

Passive Income:
This is probably the biggest advantage of investing in dividend stocks. You can treat dividends
as a passive income source which means getting paid without doing work. For the people looking
for a few alternate secondary sources of income, dividend investing is the answer.

Anyways, for making passive income through dividend investing, initially, you need to put some
big efforts to find decent dividend stocks. However, once the work is done, you can enjoy the
passive income for multiple years.

Passive Income:
If your invested stock goes up by 30% in the next 3 years, and you received a dividend yield of 3%
per year from the same stock, the combined profits are way higher than just the capital
appreciation.

24
Here you can earn double profits compared to investing in companies that don’t give any
dividends.

Protection against bad markets:

Everyone makes money in a rising market. However, the scenario is different when the market
turns sour.
In the bear market or corrections, the share price of a lot of your favorite stocks may fall. And
hence you might not be able to make a good return from capital appreciation of stocks.
However, if you have picked right dividend stocks in your portfolio, you can enjoy a decent
dividend income even when your portfolio is down.

Further, dividend stocks are generally big matured companies and hence they are less
influenced by a bear or speculative market. Investing in these companies can provide a good
hedge to your investment from a bad market. In addition, dividend investing also helps in capital
preservation. Even if the stock price of your invested company doesn’t go up, if you are getting
regular high dividends, you will be able to preserve your capital and make returns.

Steady Income:
Profits from stocks are only on ‘paper’ unless you sell them. This money is not in your bank
account. The profits or loss from stocks are unrealized until the final settlement i.e. selling the
stock. However, dividend stocks add steady income in your pockets without worrying about
selling your stocks.

Dividend Reinvestment:
You can use the dividends that you receive from stocks to buy more stocks and reap the benefits
of dividend reinvestment.

Else, if you want to diversify your portfolio, you can use that money to invest in any alternative
investment options like Bonds, gold etc. Once you get the money back in your account, you have
immense options to re-invest them back in whichever investment option that suits you.

Long-term investment:
One of the best strategies to make money from stocks is the same old philosophy of ‘buy and
hold’.

However, while investing for the long term, there may be a number of situations where the
investors might be in the need of a few extra bucks. Here, selling stocks may be the only option
available to them if they want to make money from their invested stocks.

25
Nevertheless, as dividend stocks offer a steady income stream, investors may prefer to hold the
stocks longer and enjoy the benefits of long-term investing.

Cons of investing in dividend stocks:

No investment strategy is flawless and the same goes with dividend investing. Here are a few
biggest disadvantages of investing in dividend stocks:

Low-growth companies

Most growth companies do not give dividends to their shareholders as they reinvest their profits
in expanding their businesses like opening new plants, entering new cities, buying new
machinery, acquiring small companies, etc.

On the other hand, big matured companies do not have so many opportunities and hence they
offer a large profit to their shareholders. While investing in dividend stocks, the investors may be
investing in low growth companies which may not always offer high returns.

High dividend payout risks

High dividend payout means that the company is distributing a major portion of their profits to
their shareholders. For example, if a company made a profit of Rs 100 crores in a financial year
and shares Rs 85 Crores as dividends, this means that the dividend payout ratio is 85%

Think of it from the another angle. When the company is not retaining enough profit for itself, it
doesn’t have any big money left for reinvesting in its growth. And if the company is not
reinvesting enough, it may face problem to grow, compete with the rival companies or even to
retain the same net profit in upcoming years. Moreover, if the company doesn’t grow or increase
its profits, it can’t add more value or increase dividends for the shareholders in the future.

Double Taxation
Companies pay Dividend distribution tax (DDT) of 15% to provide dividends to their shareholders.
However, once dividends are credited to the shareholders, the investors again have to pay a tax
on the capital gain.

Although, small investors do not have to pay any tax on dividends. However, if the dividend
received is more than Rs 10 lakhs, the investor has to pay a tax of 10% on the capital gain by
dividends.

26
Double Taxation

This is the worst case scenario. Dividends are not obligations and a company may decide to
cut the dividends anytime in the future. Moreover, when the company cuts the dividends, even
the share price falls significantly as the public sees it as a negative sign. And that’s why the
dividend investors may face double side trouble.

Further, many times, the board of directors may also change the dividend policy of a company.
This can again have an adverse effect on the dividend investors if the decision is made against
the existing dividend policy.

Summary:
We discussed the pros and cons of dividend investing

Traditionally, dividend investing approach was used by the retirees or the people entering their
retirement age. As these people do not have any primary source of income (regular paycheck)
after retirement, receiving small dividends per year in their account can be a good secondary
source of income.

However, these days even the young and middle-aged investors are looking forward to dividend
investing because of the different advantages these stocks are offering. After all, it is always a
joy to see dividends get credited to your account periodically.

27
 CHAPTER 7
How to use dividend yield to find
UNDERVALUED STOCKS?
In this chapter, we are going to learn how to find undervalued stocks using dividend yield model.
But first, let us understand what are undervalued valued stocks or what exactly we mean when
we say that a stock is undervalued.

What are undervalued stocks?

Fundamental analysts believe that there is a true (intrinsic) value for any share.

If the share is currently trading below its true intrinsic

Stock value
value, it can be considered as undervalued.
On the other hand, if the share is currently
trading above its intrinsic value,
it is overvalued.

For example, let’s say that Intrinsic value

by calculation we found that

the intrinsic value of a stock should
be Rs 100. However, if the stock is currently
trading at Rs 85, then it can be considered undervalued
stock and a good investment opportunity.

The long-term fundamental analysts believe that investors can make high returns if
they invest in undervalued stocks. And this makes sense too. After all, buying stocks
at a discount to their true value is always a better approach of investment.

There are a number of ways to valuing stocks like absolute valuation where investors use tools
like discounted cash flow (DCF) analysis to find the intrinsic value of stocks. On the other hand,
there is relative valuation where we use tools like Price to earnings, book value etc to value stocks.

In this module, we’ll use the dividend yield model to find undervalued stocks to understand which
stocks can be a great investment opportunity for dividend investors.

28
Stock Valuation using Dividend Yield Model
Let’s start with dividend yield. As discussed in previous lessons, dividend yield of a stock can be
calculated as.

Dividend per share

Dividend yield =
Price per share

For example, for a stock if

Annual dividend = Rs 10

Current Market Price = Rs 200

Then, its dividend Yield = 10/200 = 5%

Now, let’s understand what happens to the dividend yield when the stock price starts to drop.
Here dividend can be considered constant as they are generally distributed annually, however
the stock price may fluctuate significantly throughout the year.

Price per Dividend

Dividend
Share Yield

CASE 1 ₹10 ₹200 5%

CASE 2 ₹12 ₹160 6.25%
CASE 3 ₹15 ₹140 7.14%
CASE 4 ₹18 ₹100 10%
Clearly, we can notice that when the price per share starts to fall, the dividend yield increases.

From above the table, you can study that when price per share was Rs 200, dividend yield was
5%. On the other hand, when the price per share fell to Rs 100, the dividend yield became 10%.

29
As the share price goes up, dividend yield goes down. On the contrary, when the share price goes
down, the dividend yield goes up.

In other words, share price and dividend yield are somewhat inversely proportional to each other.

Let’s understand it further with the help of an example.

Assume that you invested Rs 10,000 in the same stock. Here are the dividend that you may receive
in the four cases.

Price per Dividend Dividend

Dividend
Share Yield per Year

YEAR 1 ₹10 ₹200 5% ₹500

YEAR 2 ₹10 ₹160 6.25% ₹625
YEAR 3 ₹10 ₹140 7.14% ₹714
YEAR 4 ₹10 ₹100 10% ₹1000

Clearly, you will receive more dividends when the yield is high. And hence, while picking a stock,
higher dividend yield should be preferred as it means that the dividends are high but the share
price is low.

However, looking at the dividend yield for just one year is not enough. You need to evaluate the
current dividend yield with the historical dividends.

30
Average dividend yield Chart
Here’s a chart showing the dividend yield at two different time (7% and 2.5%) along with the
average dividend yield line on a stock price chart.
Current Dividend
yield= 2.5%
STOCK PRICE

average
dividend yield 4.5%

YEARS
Current Dividend
yield= 7%

Two important points to notice from the above chart:

When the prices are low, the dividend yield will be high. In the chart, you can see
dividend yield equal to 7% when stock price is low.

On the other hand, when the stock prices are high, the dividend yield will be low. In
the above chart, you can see dividend yield equal to 2.5% when stock price is high.

Undervalued stocks are the companies with a low stock price. However, which price is considered
low? This can be found out using the above chart.

From the chart, we can notice that when the stock price is below the average dividend yield line
(4.5%), the corresponding dividend yield is higher. Here, we can conclude that it is better to invest
in stocks when the price is below the average dividend yield line.

In other words, Stock may be undervalued if,

Current dividend yield > average dividend yield

Otherwise, it may be overvalued.

Let us understand it further with the help of an example. Here is the historical
dividend yield for two big companies in India: Power Grid & NHPC Bank.

2017 2018 2019 2020 2021 2022

Power
Grid 0 2.5 4.3 5.8 6.1 7
NHPC
0 4.75 5.6 6.8 7 6
31
At the time of writing this book, the current dividend yield of Power Grid & HDFC bank are noted in
the table below:

Current Dividend 5 Year Avg Status

Yield Dividend Yield

Power
Grid 6.52 5.14 Undervalued

NHPC 4.83 6.02 Overvalued

Now, a stock may be undervalued when current dividend yield > 5-Yr average dividend yield.

From the above table, we can conclude that Power grid is undervalued as its current dividend
yield is greater than the average dividend yield. On the other hand, HDFC bank is overvalued as
its current dividend yield is lower than its average historical yield.

Note: You can find the details of the historical dividend yield using financial websites like
Moneycontrol, Screener, Yahoo finance or Equity master. Else, you can also calculate these
figures yourself.

Summary:
`
We studied a simple approach to find undervalued stocks using dividend yield model. A stock
can be considered undervalued if its current dividend yield is greater than the historical average
dividend yield.

Anyways, this valuation approach is useful only for the dividend stocks. You cannot use this
model for finding valuation for those stocks which doesn’t give dividends.

32
How to PICK DIVIDEND stocks?
By now, you might have a good idea of how dividend investing can help build an amazing wealth
from stock market. However, the next big question is how to pick right dividend stocks? And what
are the factor that an investor needs to check while making an investment in dividend companies?

In this module, we’ll answer the exact question. Here are the four factors that every investor should
check while picking the right dividend stock for their portfolio.

How to pick dividend stocks?

1. Investigate the dividend history
A company with a track record of consistent dividend payment for past 5-10 years reflects a
healthy sign for picking dividend stocks. Moreover, the dividends should also increase over years.

Here are a few points to understand regarding dividends:

A high dividend (or high dividend yield) just for one year doesn’t suggest that the company
can give decent dividends for long-term. Always look at the past 5-10 years while evaluating
dividend history. Although past records don’t guarantee future dividends, however, it can give
you a rough idea of expected dividends.

A stagnant or declining dividend over past few years can be a warning sign for the dividend
investors.

A company with erratic dividends or history of dividend cuts should be ignored while picking
healthy dividend stocks.

As a general rule, a company which gives consistent dividends to their shareholders from the
profits generated by their own business is an ideal dividend stock. If the corporate earnings and
dividend payments of a company is continuously increasing for past 5-10 years, it is most likely
that the company will perform well in future too.

This is because any random company can give high dividend in its golden year. However, if a
company has been giving consistent dividends for last 10 years which may include periods of
recession or bad business, it will continue to perform well and give regular dividends in future.

Moreover, while investigating for the dividend stocks, try to look for the established businesses
as they are more likely to compete, grow and pay regular dividends.
33
Here is a quick snapshot of a few of the famous Indian companies and their dividend history. By
looking into the table, you can get an idea that there are many companies who have been giving
consistent dividends to their shareholders for many years.

Dividend history of a few popular stocks in India

Last Market Market Cap Adj. Dividends per share
NAME Price (in cr) 2019 2020 2021 2022

Vedanta 266 ₹98,710 ₹18.86 ₹3.9 ₹9.51 ₹45.03

NMDC 122 ₹35,798 ₹5.77 ₹5.53 ₹7.76 ₹14.74

REC Ltd 108 ₹28,373 ₹8.25 ₹8.25 ₹9.53 ₹0

Power Finance 120 ₹31,694 ₹0 ₹9.5 ₹10 ₹0

HUDCO 39.7 ₹7,948 ₹0.55 ₹0.83 ₹3.1 ₹2.18

ONGC 137 ₹171,784 ₹7 ₹5 ₹3.6 ₹10.5

GAIL 133 ₹58,857 ₹4.13 ₹6.59 ₹5.07 ₹9.12

Coal India 225 ₹138,569 ₹13.1 ₹12 ₹16 ₹17

Hinduja Global 1,596 ₹6,679 ₹4.99 ₹9.99 ₹19.98 ₹0

RITES 287 ₹6,896 ₹10.61 ₹16.65 ₹13 ₹17

OFC 3,230 ₹27,890 ₹0 ₹178.99 ₹199.3 ₹189.75

CESC 79.1 ₹10,499 ₹0.18 ₹0.2 ₹0.45 ₹4.5

NHPC 35.3 ₹35,459 ₹1.46 ₹1.5 ₹1.6 ₹1.81

PGC 226 ₹157,923 ₹6.25 ₹7.5 ₹9 ₹14.75

Oil India 191 ₹20,739 ₹10.25 ₹10.6 ₹5 0

Tata Steel 106 ₹129,703 ₹0.13 ₹0.1 ₹0.25 ₹0.51

IRFC 21.2 ₹27,640 ₹0.29 ₹0.38 ₹1.05 0

HCL 944 ₹256,008 ₹4 ₹10 ₹10 ₹42

NCC 68.4 ₹4,298 ₹1.44 ₹0.19 ₹0.78 ₹1.94

Rail Vikas 31.6 ₹6,578 ₹0.89 ₹1.14 ₹1.58 0

Dividend yield
Another important factor that you need to look into investigating dividend stocks is its dividend
yield history.

34
While studying the dividend yield of a stock, look at the average dividend yield, not the current
dividend yield. As discussed earlier, a company with a good profit in just year may give high
dividends. But, it is the average yield for the past +5 years which can tell you the better picture of
that company’s dividend policies.

In the below table, you can find the dividend yield history and average dividend yield for the
companiesmentioned in the previous table. You can notice that there are many Indian
companies in the table with average dividend yield greater than 4% for the past five years.

Dividend yield history

Dividend Yield History Avg Dividend Last Market Market cap
NAME 2017 2018 2019 2020 2021
Yield (%) Price (in cr)

NMDC 0 3.2 5.2 5.3 7.4 5.94 122 ₹35,607

Vedanta 0 7.4 8.2 3 6.5 7.88 266 ₹98,859

REC Ltd 5.3 5.3 8.9 8.9 10.6 7.8 108 ₹28,426

PFC 2.9 6.2 0 8.7 9.3 5.42 120 ₹31,760

HUDCO 0 0.7 1.5 9.5 5.9 3.52 40 ₹7,968

ONGC 0 3.6 4.4 4.3 3.9 4.68 36 ₹1,71,595

GAIL 0 2.2 2.3 3 4.3 3.58 32.8 ₹58,212

Coal India 0 6 5.1 6.2 11.7 7.88 225 ₹1,38,661
Hinduja Global 5 5 5 5 20 9 1,587 ₹6,633
RITES 0 0 4.9 6.1 5.1 4.5 286.6 ₹6,887
OFS 0 3.4 0 6.9 7.1 4.4 3,230 ₹27,895
CESC 0 0.1 0.2 0.3 0.8 0.46 79.2 ₹10,492

NHPC 0 4.7 5.6 6.8 7 6.02 35.6 ₹35,760

PGC 0 2.5 4.3 5.8 6.1 5.14 227 ₹1,58,447
Oil India 3.6 5 5 8.3 4.7 5.32 191.4 ₹20,756
Tata Steel 0 0.2 0.2 0.2 0.5 0.3 106.5 ₹1,30,179
IRFC 0 0 0 0 0 0 21.2 ₹27,640
HCL 0 1.3 0.8 1.3 1.4 1.7 946 ₹2,56,713
NCC 0 0.9 1.5 0.3 1.4 1.34 68.5 ₹4,300

Rail Vikas 0 0 0 5.7 6.5 2.44 31.6 ₹6,589

35
Dividend Payout Ratio
Finally, check the dividend pay out of the company.
A stable dividend payout can be considered a sign of good management. It shows that the
management is taking right financial decisions in favor of both shareholders and the company’s
growth. As a thumb rule, avoid investing in companies with very high or increasing dividend
payout and be cautionary if the payout ratio is greater than 70%. Payout ratio crossing this mark
for consistent three years can be a warning sign for the investors.
In the below table, you can find the dividend payout ratio for the stocks discussed above. As
discussed, even if the dividends are continuously increasing for the past multiple years, if the
payout ratio is consistently greater than 70%, then it may be a cautionary sign.

Dividend history of a few popular stocks in India

Dividend Payout Ratio Market cap Last Market
NAME 2018 2019 2020 2021 2022 (in cr) Price

Vedanta 57.6 72.3 -30.6 23.5 70.6 ₹98,859 266

Union Bank 0 0 0 0 24.7 ₹28,911 42
Tata Steel 0.7 1.8 12.2 3.8 1.5 ₹1,30,179 107
RITES 30.7 53 63.9 70.5 76 ₹6,887 287
Redington India 19.8 26.5 31.3 57.3 39.2 ₹11,710 150
REC Ltd 40.6 37.8 43.7 30 30.1 ₹28,426 108
Rail Vikas 67.3 32.8 31.5 30.9 35.7 ₹6,589 32
PGC 34.1 44 48 53.1 61.4 ₹1,58,447 227
PFC 30.8 0 35.2 22.5 30.1 ₹31,760 120
OFS 89.8 0 105.7 97.7 86.8 ₹27,895 3,230
ONGC 32.5 28.9 59.8 22.3 27.6 ₹1,71,595 136
Oil India 58.7 53.3 29.1 15 27 ₹20,756 191
NMDC 35.8 36.4 45 36.4 46 ₹35,607 122
NHPC 51.6 51.8 45.1 44.6 48.2 ₹35,760 36
NCC 41.3 15.7 3.8 17.3 24.8 ₹4,300 69
IRFC 18.7 16.6 15.6 31.1 30 ₹27,640 21
ICICI Securities 54.7 61.7 65.4 64.9 56 ₹16,243 503
HUDCO 10.9 14 36.3 27.6 32 ₹7,968 40
(Source: Equitymaster)
36
Quick Note: In the above table you may find a few anomalies in payout ratio which are discussed
below:

The payout ratio greater than 100% indicates that the company is paying out more in dividends
than it is earning. This is typically not a good sign for the company’s financial health and the
company may cut dividend payment in the future as it is not making enough earning.

A negative payout ratio means that a company is paying dividends even when it is not
generating earnings i.e. its net profits are negative. A negative dividend payout is again a bad
sign as it means that the company is using existing cash or raising money to pay dividends to
the shareholders.

Overall, the three important factors that you need to check while investing a dividend stock is its
dividend history, dividend yield and payout ratio for the last five to ten years.

Simply picking stocks with high dividend yield or payout is not the right strategy to pick dividend
stocks. Moreover, looking at the dividend payout can give you better understanding of the
company’s financial decisions and stability for the years to come.

2. Pick fundamentally healthy companies:

A company can only give consistent dividends if it is profitable and continuously growing its
business. Look for the companies with solid growth in sales, net profit, profit margin, strong future
growth prospects and a capable management with integrity.

To analyse the fundamental health of the company, you might need to dig deeper in the
company’s financial statements. Apart for the sales and net profits, a few other factors to check
while picking dividend stocks is its debt level and free cash flow.

If you are planning to receive dividends from a stock for the next 10-15 years, the company should
be financially strong and should not collapse in the future. And therefore, always pick
fundamentally healthy companies while picking long-term dividend stocks.

3. Analyse company’s MOAT

While picking a quality company for long term investment, one of the key element to check is the
company’s sustainable competitive advantage or Moat. Here’s what Warren Buffett, the greatest
investor of our time, thinks about a company’s moat:

37
 A truly great business must have an
enduring ‘moat’ that protects
excellent returns on invested capital.
The dynamics of capitalism
guarantee that competitors will
repeatedly assault any business
‘castle’that is earning high returns
– Warren Buffett
(Letter to shareholders 2007)

The Moat can be defined as something that keeps a company’s competitors away from eating
away their profits/margins for a stretched time. And hence the companies with big moats are
able to generate economic profits for a longer time period. Here are the five different
characteristics of a company with a big moat:

Production advantage:
These are those companies which are able to find better ways of producing their products or
services. They enjoy cost advantages by improving processes, finding a better location, greater
scalability, or access to a unique asset, which allow them to offer their products or services at a
lower cost than competitors.

For example, ‘Maruti Alto’ has been the best-selling car in the ‘Hatchback’ segment of the
passenger vehicle for a very long time. This is because Maruti Suzuki has been able to build ‘Alto’
at a cheap price (with superior quality) for over fifteen years based on the demand of the Indian
audience. The can be considered a cost advantage or Moat for Maruti company.

Production Advantage:
Intangible assets are those assets that you can’t touch or see. A company can have intangible
assets, like brand value, patents, or regulatory licenses that allow it to sell products or services at
a bigger margin that can’t be matched by the competitors.

For example, Coco-cola. If you look at their products, they are just carbonated sugar water and
not much different from any other soda shop that you visit locally to buy cheaply priced drinks.
However, when this carbonated sugar water meets the brand value of coke, they are priced way
higher than what its competitors do, and still able to make way more sales and revenue.

38
Switching Cost:
A company can also create an economic moat if the switching cost for the customers is too
high. If the customer has to cost a lot of money, time, efforts or resources to switch from one
product to another, it is considered as the switching cost. If the products or services offered by a
company has high switching cost (or really difficult for the customers to give up those products)
then the firm enjoys a bigger pricing power and profit margin.

A great example of a customer switching cost is MS Excel. Although a lot of better tools compared
to Excel are available publicly, however, to make all your employees learn any new tool, the
company may have to cost a lot of time and resources.

Similarly, a few other software companies with high switching costs can be Adobe Photoshop,
Auto-desk, MS Office etc. All these complicated programs cost a lot of efforts to learn and
switching from one to another can be really difficult for the users. Unlearning and relearning
these tools demands a lot of time, money and resources like pieces of training, courses etc.

Entry Barrier:
There are few industries where the ‘entry-barrier’ acts an economic moat for the company.
These barriers can be because of multiple reasons like patents, brand recognition, a high cost of
set-up, government licenses etc.

For example, the telecommunication sector has an entry barrier because of thE huge initial setup
cost. Similarly, a pharmaceutical company has an advantage over its competitors’ due to
patented drugs, which may act a moat. No other pharmaceutical company can produce that
patented drug.

The Network Effect:

These are those companies whose value increases as their number of users increases

A few examples of companies with a big network effect in recent days can be social platforms
like Facebook, WhatsApp, Instagram etc. People are moving into these platforms as all their
friends/peers are using them which makes them more valuable. So even if there are another
better social media available, however, if your friends/family are not using them, you might be
reluctant to switch there.

A few industries like e-commerce or food-delivery especially enjoy the networking effect. More
customers are moving to ‘UBER Eats’ because more restaurants are associated with them. And
on the other hand, more restaurants are associating with UBER Easts because more customers
are moving into that platform. Overall, the users are inviting the restaurants and vice-versa and
the platform benefits from the networking effect.

39
Another great example of industries with networking effect can be ‘Credit card’ industry. Here,
customers are getting attracted to a credit card as they are accepted widely by many merchants.
On the other hand, more merchants partner up with the credit cards as they have a bigger
customer base. It’s all about networking effect for these companies.

The moat is one of the most important factors to look in a company while
investing in a dividend for long term.

Look for undervalued Stocks

A good business is not a good

investment if you
overpay for it

– Benjamin Graham

After you have analysed the quality of the company, the final step is to study the valuation i.e.
whether the company is overvalued, undervalued or decently valued. If the stock is currently
overvalued, it might not be the right time to purchase that stock. You should keep the stock in
your watchlist and wait for the price to come down.

Now, you can find the find the valuation of a stock using Dividend yield model as discussed in the
previous module. As you have already studied the dividend yield of the company while evaluating
the dividend history, you can easily use this information to value the stock.

Besides, you can also use a few other valuation tools like Price to earnings (PE) ratio or Price to
book value (PBV) ratio to find undervalued stocks. For the scope of keeping the book in-tact, we’ll
not be covering these tools in this book. But you can check these valuation tools on Trade Brains
website.

Anyhow, dividend yield model is an effective way to perform valuation for dividend stocks. And
we’ll encourage you to use that model to find undervalued dividend companies.

39
Summary:
Picking right dividend stock definitely requires a lot of time and efforts from the investors. You
have to look deeply into all the factors discussed in this module. However, once the work is done
right, you can enjoy a streamline of consistent dividends flowing in your account for many years.

The idea here is to keep it simple. Find strong companies with good past
record and promising future prospects. That’s all!

40
 CHAPTER 9
When should you sell your
DIVIDEND STOCK?

1. When you find a better investment opportunity

Exit the stock when the fundamentals of the company are not the same anymore like when you
bought the stock. For example, the company starts underperforming quarter-by-quarter; the
non-performing assets (NPA) of banking companies start increasing at a high rate; the
management of the company is changed or has become inefficient etc.

2. When you find a better investment opportunity

If you find a company whose fundamentalsare better than your current stock and is giving better
performance & consistent returns, then it may be the right time to exit a stock. Moreover, this
case is applicable when you do not have extra money to invest in your budget. In such scenario,
you should sell the previous stock and grab the better opportunity.

3. When you need the money

Do not sell the stocks just to keep the money in your saving account. Sell the stocks when you
need the money like paying for a new house, new car, and your kid’s tuition fee etc. There cannot
be a better time to exit a stock than when you need the money most.

Anyways, dividend stocks are not like common stocks as here you also get regular income
through dividends. Therefore, there are a few other factors that you need to look into your
dividend stocks to decide whether it is time to sell that stock.

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After investing in dividend stocks, look for the following signs periodically to avoid any pitfall in
your invested company. Here are the three signals that you should exit a dividend stock:

1. Dividends start declining:

A fall in dividend for just a year compared to the previous one can be ignored by the investors as
any businesses can have a few losses in some year. However, if the dividends start continuously
declining year-after-year, it may be a sign for the investors to exit.

2. High dividend payout

A payout ratio greater than 70% for the continuous years may be a warning sign that the
company is not retaining enough profit for its growth.

3. An adverse change in dividend payout policy

If the company changes its dividend policy against the favor of the investors, then again it is a
sign to exit that stock. Stay updated with the company’s dividend policy by reading its
quarterly/annual reports and corporate announcements.

Conclusion:
Deciding when to sell your dividend stock is not a complicated process as unlike the financials
of a company, dividends are transparent and easy to evaluate. As a thumb rule, if the dividends
and earnings of a company is consistently declining year-after-year, it is a sign to exit that
stock

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 CHAPTER 10
Closing Thoughts
Picking the right funds to invest can be tough for beginners. While investing in the stock market,
there’s no guarantee that the price of the stock that you bought will go up, no matter how much
you analysed it. There are a thousand of factors that can influence the share price.

Fortunately, dividend investing is relatively easier investment approach.

By investing in dividend stocks, the investors can build a passive stream of income as these
stocks distribute dividends among their shareholders multiple times in a year. And if you hold
the dividend stock for long term, you are entitled to receive all the dividend payments that the
company distributes during your holding period.

Moreover, if the company does well and its business keeps growing and generating profits, your
dividends will also increase over time. And hence, even by keeping the same number of stocks,
you’ll be entitled to receive more dividends.

Anyways, before you make your investment in any stock, do the proper research and take your
time to study the past dividend history and future growth prospects. A little effort from your side
can help you earn a lot of dividends in future.

And our final advise, build a diversified portfolio of dividend stocks and do not depend entirely on
just one stock. When you have invested in just one stock, no matter how strong the company is, if
it decides to cut the dividend payment, your income stream will stop. Hence, build a portfolio of
multiple fundamentally strong dividend stocks so that a decline in dividend from one stock
doesn’t affect your entire portfolio drastically.

Remember, if the work is done right, you can enjoy long-term steady flow of dividend income
with a very little risk on your portfolio.

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