Importance of Dividend

Dividends have become increasingly important to investors, who are unable to find decent income from more usual sources, such as corporate bonds and savings accounts. Hence, investors have to move further up the risk curve to generate income from their savings. A portfolio that includes dividend yield stocks can help in solving this problem alongwith maintaining the risk profile.

Let’s look at one such stock (of many) which has provided safety with annuity

From the above table, it can be seen that the company has performed very well which has in-turn enhance its share price along with providing consistent dividends. Further, the increase in cash profits signifies that the downside is protected if something goes wrong.

Why dividend is important:-

  1. Dividend are actual income
  2. Dividend have tax advantages
  3. Dividend allow you to purchase more shares

A stock that can grow their dividend payments over time consistently provides compounding like no other opportunity

Sure, when you’re starting out, or in a hurry to accumulate some wealth, collecting a few percent on your cash hardly seems worth it but re-investing dividends is one of the most powerful tools available to an investor for boosting returns over time.

For anyone considering investing in dividend stocks, there are three key points to remember in relation to dividend reinvestment:

  1. Reinvesting Dividends produces exponential growth of investments. The money made by way of dividends attracts dividends in the future, and there is a rollover effect that compounds the return.
  2. To produce greater income in the future, dividend reinvestment should always be considered where dividends income is not currently required. If you take the dividend, the likelihood is that you will spend it. Reinvesting now produces greater gains over time.
  3. Reinvesting dividends when the stock price is depressed stores greater income potential for the future.

Time is the key

Trading stocks are all about the timing of the market but investing with a dividend reinvestment strategy benefits from the long-term approach as the effects of dividends are low for the first 10 years but become increasingly pronounced from there on.

Most of us would have heard the story of Wipro where Rs 10000 invested in 1980 would have become Rs 535 Cr by 2013. However, what one does not understand is the importance of dividends (multiply the number of shares held with a dividend for a single year say 2013) i.e. 96,00,000 shares * Rs 7/share = Rs 6.72 Cr i.e. the dividend which you would have got for that year. Over the past 33 years, one would have received Rs 118 Cr as dividends.

Conclusion: Whether investing for growth or for income in the future, reinvesting your dividends will add extra punch to the performance of your investment



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