WANT GOOD RETURN, LOW RISK – INVEST IN DIVIDEND PAYING COMPANY Part 1 :)

Dividend= Extra Income. Investing in high dividend paying companies is wise decision as dividend paid is tax free at the hand of the investors; but what should be given greater importance is “preservation of capital”. In that case investors have a fine amount of dividend-paying stocks in portfolio. The tax on dividends is rewarded by the company at the time of announcement of the dividend.

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Well, the price of dividends may differ from company to company depending on profits earned, cash flows, investment and the policies of the company. Company announces a small size of earnings as dividends. The rest is used in business to spend and generate high returns. Final dividends are also a purpose of the future cash requirements of the company.

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A dividend is always paid on face value of the company. Dividend yield is considered as the ratio of the annual dividends amount announced to the existing market price of the company’s stock. The dividend yield ratio shows what investors earn on their stock. For example, a 10 percent dividend on Rs 100 equity share means a dividend of Re 10 per share.

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Dividend yield: Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price.In the absence of any capital gains, the dividend yield is the return on investment for a stock. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.

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To calculate dividend yield is main work to analyze the proper income from an investment. Dividend yield is a major determining factor for stock prices. Dividend yield is calculated as follows:

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It should be clear that dividend yield is not the same to the amount of dividend paid by a tax company. It is the dividend payout with reference to the market price of the company’s stock. While the dividend is received, it is computed as a percentage of the current market value of the share and is termed as the dividend yield.

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Dividend yield also specifies how an investor is prepared to pay for the predicted dividend stream generate by a single stock. Investor uses the projected dividend values over a period or past dividend values for the analysis.

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Dividend Payout Ratio The percentage of earnings paid to shareholders in dividends.

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The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. A dividend payout has a direct effect on the cash balance of a company. Some companies follow the policy of sustaining dividend payouts or gradually increasing them. These companies demand higher values in the stock markets as compared to the companies following erratic dividend payout policies.

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Preferred Dividend coverage ratio: Preferred Dividend coverage ratio is a coverage ratio that measures a company’s ability to pay off its required preferred dividend payments. A healthy company will have a high coverage ratio, indicating that it has little difficulty in paying off its preferred dividend requirements.

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This ratio gives investors an idea of a company’s ability to pay off its preferred dividend requirements, and also an idea how likely they are to be paid dividends. If the company has a hard time covering its preferred dividend requirements, common shareholders are less likely to receive a dividend payment on their holdings.

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