Investors buy shares of companies with two objectives (1) to make money from capital appreciation & (2) to make money from dividend income. Capital appreciation benefit can be achieved if an investor buy’s low and sells high. But substantial dividend earning over a period of time requires implementation of value investing to its best.
Companies do business to earn profits. Shareholders invest their money with expectation of sharing profits made by the company. The board of directors of company distributes the profits among shareholders in the form of dividends. Value investors plan to buy high dividend paying quality stocks at such prices that dividend yield is outstanding.
Not all companies can boast to have paid consistently high dividends to its shareholders, only those companies who has already reached a kind of saturation in its growth and can predict their future earnings with reasonable surety pays high dividends. It must be noted that companies are not obliged to share its profits as dividends. But when growth factors of company saturates, in order to keep shareholders glued to its shares, companies pays healthy dividends.
When we say that the growth of company has been saturated it means it does not mean that the company has stopped making profits. Saturation is in growth of companies sales results and profit levels. When there will be possibility of only small growth, share trading will come down substantially, as because most of the investors buy shares for capital appreciation.
But large, saturated companies will not see much rise in its market price. Hence such companies distributes dividends to attract long term investors (like value investors) whose investment focus is on dividends only.
Such big companies know that by re-investing their profits within their own company perhaps will not help much their balance sheet than it will harm their market capitalization. So instead of using their profits for companies they distribute them to shareholders for keeping them interested in their stocks.
Investing in stocks with dividend focus makes stock investment less risky. In fact some investors will even say that dividend linked investment is as safe as debt linked investment options.
Like in debt linked investment plans, interest income is very stable, similarly large stable companies pays dividends with great deal of predictability. Such investors not only gets dividends benefits but also leaves their option open to capitalize on market price appreciation.
Best for the dividend focused investors in to reinvest their dividend income to buy more share that trade at high dividend yield prices. The bigger the portfolio gets, higher will be the dividend income and more will be the opportunity to buy high dividend yield stocks with this income.
It is also important to say to my readers that initially you will not find lot of stocks that pays consistent high dividend yield. But it is also a fact that reinvesting and compounding of dividends will eventually make high income for investors. Important is to hold the share for long term. Identifying value stocks that pays high dividends is very important step of dividend focused investing.
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