Investing in stock markets opens up better growth prospects for your capital and hence it has become a preferred investment for many, especially individuals with a high-risk appetite. Needless to say, this can be realised only when investments are made in securities of companies having the highest potential or the most suitable risk-reward ratio. For the same reason, investors who have a low-risk profile and want regular income from their investments, opt for best dividend-paying stocks. Highest dividend-paying stocks belong to companies that are financially sound, are established in their domain or are domain leaders, possess economic moat over peers and have performed consistently well in the past.
Types of Top Dividend-Paying Shares?
Securities associated with highest dividend payments can be listed as follows –
- Equity shares
Equity shareholders of a company are eligible to earn a portion of the net profit realised in a financial year. These securities form a major segment of the highest paying dividends instruments available in the market.
- Shares of large-cap companies
Stocks issued by companies having a market capitalization value of higher than Rs. 20,000 Crore is known as blue-chip stocks. These companies have a proven track record of yielding substantial returns on investments, owing to a secure financial base and strong management. These are one of the highest dividend-paying shares an investor can purchase to increase their annual income through profit distribution.
Stocks of large-cap companies are one of the best dividend-paying stocks available in the market, as they provide not only high but stable periodic returns on total investments.
Large-cap companies have the necessary resource base to preserve their production requirements during times of economic slowdown in a country. As these companies generally provide services at reasonable prices appealing to a large demographic, demand does not falter to a great extent. This allows such funds to generate returns even in adverse market situations, ensuring annual dividend returns to investors.
- Penny Stocks
Penny stocks are one of the highest dividend-paying stocks available in the market. Such shares are offered by start-up companies at tremendously low prices. Massive income can be generated through investment in penny stocks, as companies providing such securities have tremendous growth potential. However, businesses raising funds through penny stocks are not listed in major stock exchanges in India such as BSE or NSE, they are only registered with minor exchanges across the country.
- Multibagger Stocks
Multibagger stocks are one of the top dividend-paying sharesas well. Businesses issuing such stocks can be both large and small-cap. Large-cap companies looking to raise finances for expansion purposes, or small-cap companies having tremendous growth potential can issue Multibagger stocks. Generally, companies issuing these top dividend-paying shares can be identified easily as they have a large range of offered products and services guaranteeing better market stability.
- Exchange-Traded Funds
ETFs are traded as standard securities in a stock exchange, generally comprising of shares of companies operating in a particular sector. These act as one of the best dividend-paying shares, as asset management companies target booming sectors demonstrating tremendous growth potential. ETFs generally try to match the performance of an underlying benchmark index, thereby minimising the element of risk associated with such investments.
Risks Associated with the Highest Dividend-Paying Shares
Highest dividend-paying stocks pose a risky investment option as they are primarily composed of equity investments. Such shares are heavily dependent on market fluctuations and prevailing socio-economic conditions in a country. A downturn in the production cycles significantly impacts the aggregate demand in the market, hampering revenue generation of businesses. In the short term, investors run the risk of incurring a loss due to such cyclical fluctuations.
However, these problems do not persist in the long run. Top dividend-paying shares are issued by companies having a financial and productive competency. Thus investors can be assured that they will benefit during the business cycle boom if they choose to pool their resources in such companies.
Features of highest dividend-paying stocks?
It is important to note that not all stocks that pay dividends can be considered as good stocks. Some stocks may pay high dividends to attract investors while accruing debt to meet the payout demand. The signs of best dividend paying stocks are:-
- Consistency in dividend payouts: This shows the company is sustainable, has the resources to meet dividend requirements and is strong fundamentally.
- A steady increase in dividend payouts: A small yet steady increase in the dividend payouts by a company is an indicator of the company’s underlying growth potential.
What should you keep in mind before investing in highest dividend-paying stocks?
Here are the following things investors must keep in mind before selecting high dividend paying stocks :-
- Understand the business and sector: Investors who have shortlisted high dividend paying stocks must know the ins and outs about the company and the nature of the sector it belongs to. For instance, certain sectors are very sensitive to negative news such as pharma and energy, due to strict regulatory compliance standards. Consequently, any defaults here will affect the dividend payouts as well. If investors are looking for highest dividend stocks in such sectors, they must be aware of the inherent volatility. It is advisable to go for companies who have a history of strong governance and holds high compliance standards.
- Avoid Companies With High Debt: A company paying high dividends despite existing debt levels is often doing so to just keep its stocks valuable. This is a red flag when it comes to long term investing as it is an indicator of the company’s weak financial health. To understand this facet better, investors must look at the company’s debt to market-cap ratio. If this ratio increases over a period of time and shows no signs of reducing, then its good to not invest in such a company. In the long run, debt impedes a company’s growth prospects, affecting profits and consequently dividends.
- Be cautious with high dividend yield: Dividend yield is calculated as Annual (Dividend / Share Price) x 100. This means a high dividend yield could be due to an underperforming security and hence can be misleading. So investors must also look at other factors like consistency in dividend payout and underlying fundamentals of the company rather than solely basing their decisions on high dividend yield.
- Consider the payout ratio: Payout ratio is an indicator of a company’s ability to support dividend payouts. Payout ratio is obtained after dividing the dividend per share by the earnings per share. A dividend payout ratio greater than one signals that a company is paying more dividends than it can support. This is red flag investors must pay heed to. A high dividend payout ratio may indicate a lack of long term stability and consequently, a company’s capacity to pay dividends regularly.
High dividend paying stocks are ideal for investors who want to earn a steady income from the stock market without exposing themselves to high risk. High dividend paying companies have a history of stability and consistent financial performance and are hence attractive options. While selecting the best dividend stocks for your portfolio, ensure you know about the underlying fundamentals of the business as well as have thorough knowledge about the sector and its inherent risks.