Every investor has a common goal – to make money from his or her investment. There are two routes through which this can be achieved
- Capital Appreciation
- Making money from the dividend payout
For capital appreciation, the fundamental is simple. Buy when low and sell when high. The difference is the profits. Most investors aggressively follow this principle and are always on the lookout for good stocks at a cheap valuation.
However, there is another effective way to make money from shares which are often overlooked by investors especially the uninitiated. It is through Dividends. Read on to know more about how to make money from dividends.
Dividend - Meaning
A dividend is the amount of money paid to the shareholders from the earnings (including reserves) of the company. It is a reward given to you, as a shareholder for investing your money in the company. It is a way to:
- Return a portion of the profits to the shareholders
- Attract more investors
- Show financial strength
- Create more demand for their stock which can have a positive impact on the market value of the shares.
There is no legal obligation for companies to issue a dividend. Newly started companies or those with a high growth rate seldom pay out dividends. This is because they need to reinvest their profits for research, growth or expansion. However, established companies offer a regular payout to reward their shareholders.
When the dividend is announced, it decides a record date and all registered stockholders (as on the record date) are eligible to receive the dividend payout in proportion to the number of shares held by them.
Frequency of dividend payout
Usually, companies declare dividends twice in a year i.e. Interim Dividend and Final Dividend. However, this is purely at the discretion of the company and is not subject to any guidelines or rules.
Types of dividend:
A dividend is a proportion of retained earnings that is paid out to the stockholders. There are five types of dividend payout mechanism:
This is the most popular and commonly used dividend type. Cash dividends are usually done through electronic transfers to the investor’s bank accounts or through cheque payments. For example, ABC Co.’s Board of Directors declared a cash dividend of Rs. 3 per share for the 2 lakh outstanding shares, to be paid on 30th Sept. Ms. A holds 2,000 shares of ABC Co. She would receive Rs 6,000 as dividend income in her bank account on the said date.
Stock dividends are paid to the shareholders by giving them additional new shares of the company. This allotment is done at zero consideration. The issue of stock dividends is done on a pro-rata basis. In case the company issues additional stock (as a dividend) which is less than 1/4th of the number of existing outstanding shares, it is treated as a stock dividend. If the new issue is of a greater proportion (i.e. more than 1/4th), then it is referred to as a stock split. The fair value of the new stock issued as a dividend is calculated basis the fair market value on the date of dividend declaration.
Dividend payouts done through promissory notes are scrip dividends. At certain times, companies may have a cash crunch or insufficient earnings for them to pay out dividends. In such scenarios, they may issue scrip dividends to the shareholders. The shareholders are given a note or scrip that promises payment at a certain future date. Usually, these promissory notes come with a definite maturity date. They may or may not be interest bearing.
Bond dividends and scrip dividend are similar in principle. They both indicate a dividend payout at a deferred future date. In the case of a bond dividend, the company makes a promise to pay out the dividend at a later date in the future. To that effect, it issues bonds to the shareholders instead of cash. Bonds used as a way to pay dividends always come with interest. Usually, bond dividends have a longer maturity date as compared to scrip dividends.
Some companies pay the dividend in the form of assets (excluding cash). For instance, a company may distribute its superfluous assets or own products as dividends. This form of dividend payment is not very common in India.
Making money from dividend
Most investors make the cardinal mistake of taking the dividend yield as an absolute value. They feel that a yield of 2% or 3% is too less for them to make a good amount of money from dividends.
However, as a prudent investor, you must keep the following points in mind:
1. Growth with time
An established or fundamentally robust company will keep on increasing the dividend payouts with time. Also, while the dividends will increase, your purchase cost stays constant throughout the holding period.
So, if you calculate the dividend yield, the numerator (annual dividend) will keep on increasing while the denominator (purchase cost) remains unchanged. In short, a higher yield in the future.
Expert Tip: Making money from dividends is like a test match. You need to play consistently in the long run. You should not treat it as a 20-20 match.
It is important to understand the tax liabilities for income from dividends. If the dividend is paid by an Indian company, it is exempt from tax until such income does not exceed Rs. 10 Lakhs. Dividend income above 10 Lakhs is subject to a 10% tax.
However, dividends received from a foreign company is added under the category “Income from other sources” and taxed as per slab.
Expert Tip: Hence, it is important to choose the right stock to get more net income in hand.
Top #5 Things to consider before dividend investing
Making money from dividends needs careful evaluation of several factors. These include:
1. Yield Percentage:
The dividend yield of the stock at the time of investing. It is important to check the yield percentage and not just the dividend per share.
2. Profit Growth Rate:
The growth rate of the company’s bottom and top line. The profit growth rate can be useful in projecting future dividend earnings.
3. Financial Health of the Company:
The overall health of the company. You should check the balance sheet to find the amount (and type) of debt. Too much debt or continuous fall in sales revenue may pose risk to dividend income in the future.
4. Dividend History:
Remember that paying a dividend is not an obligation. Companies are free to reduce or stop these payouts. Hence, analyse the dividend history of the company under consideration.
5. Tax Rules:
Current tax rules applicable to dividend income.
If you feel that you are not able to decide the highest paying dividend stocks or need help in choosing the right stock for you, you can always reach out to experts like IndiaNivesh. Their in-depth understanding of the Indian markets, extensive research, and experienced team ensures that each customer can make the right choice as per their needs. They regularly come out with useful reference material which highlights the top dividend-paying stocks. IndiaNivesh offers financial solutions in numerous domains – Mutual Funds, Broking, IPOs, Insurance, Derivatives, PMS, Investment Banking, Wealth Management, and Strategic Investments. Get in touch with the experts today!
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
Online Trading – How does online trading work?
India ranks second in the global list of number of internet users. After all, “Online” is the new place to be. Whether it is ordering groceries, buying furniture, paying your insurance premium or making travel plans, it can be done online these days. In fact, it is increasingly becoming the preferred mode of doing transactions. No wonder, by 2018 Indians had started consuming 1GB data daily as compared to 4GB per month earlier (Source: Nielsen India). And this is just the statistics for smartphones! So, it comes as no surprise that online trading in India has also picked up momentum in the recent times. If you are seriously considering investing in the stock markets, then it is essential to find out about online trading.What is Online Trading?Online trading is the act of making buying and selling transactions for shares and other financial products through a digital or online platform. Anyone with an internet connection, trading account, bank account and sufficient funds can go for online trading. The biggest advantage of this mode of trading is the convenience factor. You can buy or sell stocks and securities from the comfort of your home or even while on the go. Additionally, cumbersome paperwork is possible at the click of a button. Online Trading in IndiaOnline trading in India started in the year 2002. It has brought a paradigm shift in the trading environment. Automation of the trading process has significantly brought down the turnaround time and paperwork involved. It has streamlined the process and made it more flexible, simple and customer friendly. Thanks to this wave of automation, the capital markets have witnessed a 1488% growth in the last decade. Mobile trading has also seen a solid jump in the recent years. Currently 10.15% of the average daily turnover on NSE is through this route. This is a growth of more than 800% in the last five years.How does online trading work?Majority of the stock market trading takes place on India’s two exchanges – National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Before you can understand how online trading works, it is important to understand the various involved components. In order to start online trading, one needs to do the following:1. Demat and Trading Account Anyone who wants to do online stock trading in India needs to have a trading account and demat account. What is a demat account?A demat account is an account which holds the shares or securities in an electronic format. A trading account facilitates the transactions (buying and selling) in the stock markets. All the buy or sell orders are placed through this account. The demat account is similar to a bank account in which all the debit and credit transactions are made. Many service providers offer a 2-in-1 account which combines the benefit of an online trading and demat account. Some banks also offer a 3-in-1 account. This adds demat and trading facility to your savings bank account. We will elaborate more on the steps to open a demat/ trading account in the later part of the article. So, online trading account can be used for or margin trading, delivery based trading and derivative trading. It can also be used for investing in IPOs and mutual fund. However, demat account is not mandatory for making investments in Mutual Funds. 2. Depositories There are two depositories that are registered with the SEBI- National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). They act as the custodian for dematerialised securities. They have the accountability of safe-keeping the securities/portfolio. Depositories provide their services through Depository Participants (DPs). Banks, trading members and financial institutions registered with SEBI can act as DPs. 3. Learn the stock market terminology Before you begin to tango, you need to know the steps. Similarly, in order to do any online trading, one needs to be familiar with common terminologies and basics. The stock market works on the basic principle of demand and supply. One should keep a tab on financial affairs, market news, etc. How to open a demat or trading account?1) Reach out to a broker / Depository Participant:The first step is to find a registered stock broker. Broadly speaking, there are two kinds of brokers: a) Full Service Brokers: These brokers offer a wide range of services in addition to stock trading. Such as financial research, market updates, tax planning and retirement planning. b) Discount Brokers: These brokers provide only trading facility. Due to their no-frills services, their charges are much lower as compared to full-service brokers.While selecting a broker one should consider the following:i) Account Opening Charges:This is the amount charged for the opening of the demat or trading account. ii) Account Maintenance Charges:This refers to the annual fees for maintaining the demat or trading account. iii) Brokerage:Brokers levy certain fees for processing the orders (buy /sell) placed by the investors. The commission charged varies from one broker to another. They also depend on the type of transaction such as intraday transactions, transactions involving delivery, futures and options, etc. Some also offer discounts basis the number or value of trade conducted. iv) Technical expertise and service record:You should not blindly select the cheapest alternative. The quality and nature of service should be the most important criteria. If a particular stock broker has an exemplary service record, the higher brokerage charges may become justifiable. 2) Complete account opening formalities:The broker provides the trading account application form. The same needs to be filled up and submitted with the necessary KYC documents. These include:i) PAN Cardii) Identity Proofiii) Address Proofiv) Cancelled cheque (for the account that will be linked to the trading account)v) Bank statement for the last six months (only applicable for derivative segment trading)vi) PhotographsDocuments such as Aadhar, Driver’s License, Passport, etc. are considered valid for this purpose.In addition to the application forms, you also need to sign a Power of Attorney (PoA) in favor of the intermediary/broker. This is required for the transfer of securities (margin purposes), settlement of trades and funds from the client's account and for recovery of the amount payable to the broker/DP.After successful verification of all the details provided, the trading account details are shared with you for future reference.There are many online stock trading websites. However, choosing the right one can make the entire process more streamlined, easier and lucrative for investors. IndiaNivesh is a well-known financial services partner in this domain. IndiaNivesh continuously keeps on changing and adapting as per the market sentiments and evolving customer needs. State-of-the art technological tools combined with an experienced team have been delivering customised financial solutions since the last 11 years. A range of services related to broking, institutional equities, portfolio management, investment banking, private wealth and corporate advisory are offered.Final WordsIf you keep all these points in mind, online stock trading can be a non-intimidating, easy and profitable income generator. And above all, you must remember that you must think long to get the best out of the stock markets. Patience is a virtue! Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Mutual Funds – How to Plan your Retirement with Mutual Funds
A famous motivational writer had once said, “Like all successful ventures, the foundation of a good and comfortable retirement is planning”. In fact, planning for your golden days should ideally start during the prime itself. Retirement planning is a crucial financial goal. There are multiple products available such as Pension plans, Provident Fund, POMIS (Post Office Monthly Income Scheme), Tax Free Bonds, etc. However, one product that stands out from the crowd is Mutual Funds. What makes Mutual Funds so special?• FlexibilityMutual Funds offer great degree of flexibility to the investors. You can start with a contribution as low as just Rs. 500. There is no upper limit on the amount that can be invested in these schemes. • Potential for higher returnsMutual Funds have the potential of generating higher returns as compared to the traditional instruments such as FDs, PPF, etc. • DiversificationWith Mutual Funds, investors get access to multiple asset categories. You can choose a scheme which is in sync with one’s risk appetite, financial goals, investment horizon. Diversification enables investors to strike the perfect balance between the 2Rs – Risk and Return. In short, there is something for everyone. • Tax efficienciesMutual Funds are relatively more tax-efficient. For instance, ELSS Funds qualify for deduction under Section 80C. Long-term capital gains on equity funds are exempt from tax till Rs. 1 Lakh. • Ease and transparencyThey are extremely investor friendly. The application and transaction process are simple and hassle-free. Moreover, they are transparent as all the required information (past performance, investment details, etc.) are easily available. So, which all Mutual Funds can you invest for your retirement planning?Before forming a Mutual Fund Retirement Plan, you should assess these factors – • How much risk you are comfortable with? • How long will you continue to work? Or How far away are you from retirement?• Retirement corpus that you want to have?Basis these, you can choose from any of these options-1. Equity FundsThese Mutual Funds invest a significant part of the corpus in the stock markets. They have the potential to generate higher returns as compared to other investment avenues such as FDs, debt funds, etc.). Equity funds invest across different market cap stocks basis the scheme’s objective. When should you go for these? Equity Funds by nature are aggressive. They come with a high-risk factor. So, if you are someone who has a good risk appetite you can go for these. Also, equity funds are more suitable for investors who start planning early. So, if you are in 30s, are going to be earning for a long time or basically far away from retirement, equity funds can be a good retirement planning option. 2. ELSS FundsELSS Funds serve a dual purpose. In addition to being a good long-term investment option they also provide tax savings. As per Sec 80C, investments in ELSS (till 1.5 Lakhs) is eligible for tax deductions. Also, the capital gains (long-term) on these funds are exempt from tax till Rs. 1 Lakh. The dividend paid is also tax-free in the investor’s hands. Additionally, compared to other tax saving scheme, they have a shorter lock-in period (3 years). When should you go for these? If you do not want to invest in two different set of products – one for retirement planning and the other for tax planning, ELSS Funds can be a good choice. But remember, that these funds also invest in equity market, so you need to have a decent risk appetite. Also, though they have a short lock-in period of three years. So, you should try to remain invested for at least five to seven years. That will help you to maximise the return potential. 3. Pension FundsMutual Fund Pension plans are debt-oriented hybrid funds. They invest a big chunk of the corpus in government securities, low-risk bonds and other such money market products. The balance is invested in stocks, equities and their derivatives. As they are hybrid funds, they offer best of both the worlds (i.e. equity and debt). The equity portion helps the Mutual Fund Pension plans grow and earn higher returns when the markets are strong or in an upswing. The debt portion helps to bring down the risk quotient of the investments. Mutual Fund Pension plans are taxed as per the rules applicable for non-equity investments. When should you go for these? If you have a low-risk appetite but still want some equity exposure, then you can try out the mutual fund pension funds. 4. Sector FundsSector or Thematic Funds invest in stocks from a specific sector such as banking, utilities, energy, etc. As the market exposure is restricted to only some select sectors, their risk quotient is higher when compared to traditional MFs. When should you go for these? If you have in-depth knowledge about a certain sector/ industry or can constantly monitor policy changes, market fluctuations, economic conditions, then you can go for these. Many sector investors start when the sector funds are beaten down and sell when they recover and grow. 5. Asset Allocation Funds Asset Allocation Funds invest across a wide range of instruments. This includes equity, debt, bonds, government securities, real estate stocks, etc. Some AMCs offer a scope to alter the portfolio composition. This option can be helpful for retirement planning. For instance, you can opt to reduce the equity percentage with age so as to reduce the risk. When should you go for these? You should opt for Asset Allocation Funds when you would like the fund to rebalance your portfolio based on a pre-set asset allocation option without regular intervention. It is actually a hassle-free retirement planning option.Ways to invest in Mutual Fund:There are multiple ways to invest in a Mutual Fund. 1. Lump Sum: Most option people invest in a lump sum by putting in one go. However, there are systematic options of investing in mutual funds as well. They are:2. SIP: Systematic Investment Plans are a boon for investors who want to start small. It offers flexibility and also creates a disciplined attitude to savings. SIPs are also a great way to spread risk across market cycles. Some of the key benefits of SIPs are:• You can start with amount as low as Rs. 500• Investment through SIPs ensures regularity. It removes worries such as timing your investment, looking at market trends, etc.• SIPs have the advantage of compounding. They help to average out the cost and optimise earnings in the long-run.• There are multiple kinds of SIP Plans available. For instance,• Top–Up SIPs which allow investors to increase their contribution amount over time.• Flexible SIPs offer the flexibility to increase or decrease the SIP amount. This ensures that in times of cash crunch or an unexpected windfall, the investor is able to put the money to the best use. 3. STP: Systematic Transfer Plans are like Systematic investment plan but it is a transfer from one fund to another in a systematic manner, instead of investing the entire amount in the target fund in a lump sum. This is a very easy investment option for the retired people where you have a large corpus for investment but do not wish to enter the target fund in one go. Hence you can park your funds in another fund and then systematically transfer the same over time.You can also withdraw your investment systematically and create your own pension fund by using:• SWPSystematic Withdrawal Plans are like quasi pension schemes. They allow individuals to draw a fixed income from their mutual funds in the future/ post retirement. The frequency of withdrawal can be monthly, quarterly, bi-annually or annually basis the individual’s requirement. Conclusion:It is never too early to start planning for your retirement. All you need to choose a scheme or fund that suits your requirement. And if you feel confused about which is the best mutual fund for retirement planning, you can always reach out to market experts such as IndiaNivesh. They offer a wide range of services in areas such as equities, mutual funds, derivatives, IPO, insurance and corporate advisory. Their in-depth market knowledge, experience and technological expertise will ensure that you can have a robust Mutual Fund Retirement Plan in place.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
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