Many dream of earning a consistent income from the stock market without doing much after setting it up. Today, we’re setting ourselves a challenge – to create a portfolio that can potentially generate ₹50,000 per month in dividends. This will involve building a list of dividend-paying stocks and learning how to realistically achieve this goal.
What Are Dividends?
Let’s start with the basics. Dividends are a share of a company’s profits distributed to its shareholders. The concept of dividends dates back to the 1600s, when the Dutch East India Company used profits from trade voyages to pay their investors. Even today, many companies redistribute their profits through dividends.
But how do we find companies that pay dividends consistently? That’s the purpose of this article – to understand which companies offer dividends and how to build a portfolio around that.
Step 1: Identify Profitable Companies
A company must be profitable to pay dividends. To evaluate a company’s profitability, we can use the Return on Capital Employed (RoCE). RoCE measures how efficiently a company generates profit from its assets. A company with a high RoCE (above 10%) indicates efficient use of capital. In other words, you want companies that give a substantial return relative to their assets.
Next, consider Earnings Per Share (EPS). Look for companies with EPS growth of at least 10% year-over-year, which indicates strong profit growth. This ensures that the company is not just profitable now, but likely to remain profitable in the future.
Step 2: Understand Dividend Yield
Dividend yield is the next metric to pay attention to. It’s a comparison of the dividend payout to the stock’s current market price. For example, if a stock trades at ₹100 and pays a dividend of ₹10 per share, the dividend yield is 10%.
Anything above 2% is considered a good dividend yield. However, remember, a company’s primary goal is to grow, so high dividend yields might not always be the best investment strategy. You should balance dividends with the potential for stock price appreciation.
Building the Portfolio: Screening for the Best Dividend-Paying Companies
Using the screening tool, we’ll filter out companies based on these criteria:
- Market cap: Over ₹10,000 crore (to focus on stable, larger companies).
- RoCE: Above 10% (ensures profitability and efficiency).
- Profit growth: Above 10% for the past three years.
- Dividend yield: Above 2%.
After sorting the results by market cap, here’s a list of some potential dividend-paying stocks:
- Coal India: Dividend yield 8.86%
- ONGC: Dividend yield 6.39%
- NTPC: Dividend yield 4.28%
These are high dividend yield companies, but what about the risks?
The Risks: Dividend Yield vs. Stock Price
Dividends are not guaranteed. Imagine building a portfolio based on a 4% dividend yield, but the stock price falls by 40%. Suddenly, the dividend doesn’t seem as attractive. A dividend is a nice bonus, but the stock’s growth is where the real long-term value comes from.
If the stock price drops significantly, you could lose more in capital than you earn in dividends. This is why focusing solely on dividends can be risky.
How Much Capital Do You Need for ₹50,000 per Month?
Let’s get to the heart of the matter. To generate ₹50,000 per month or ₹6 lakh per year with an average dividend yield of 4%, you would need a base capital of ₹1.5 crore. This means only individuals with substantial capital can realistically achieve this level of passive income from dividends alone.
The Reality of Dividend Investing
While dividend investing can seem attractive, it’s important to recognize its limitations. Stocks are primarily growth vehicles, and dividends are just the cherry on top. Companies are not obligated to continue paying dividends, and they can choose to stop payouts based on market conditions.
Even Warren Buffett, who earns billions in dividends, didn’t build his portfolio based on dividends alone. He chose companies with growth potential. Dividends were just a byproduct of owning quality stocks for the long term.
Conclusion: Don’t Fall for Passive Income Myths
The idea of earning passive income through dividends might sound exciting, but the reality is much more complex. You need a significant amount of capital, and even then, dividends aren’t a guaranteed or primary source of income. Instead, focus on investing in companies with solid growth potential, where dividends are an added bonus.
We hope this breakdown helps clear up some misconceptions about dividend investing and passive income. If you’re serious about your financial freedom, the path lies in learning, understanding, and smart investing – not chasing get-rich-quick dreams.
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