Primer: What are dividend yield stocks?

If you are a long term investor in stock market, you must take dividend history into consideration before choosing a company for investment. If you choose the stock carefully, dividends can provide safe and regular source of income.

As the company pays regular dividends, the investment can be treated as investment in coupon bond, which pays interest at regular frequency. On top of that, dividend paying stocks have better capital appreciation potential than coupon bonds. Let’s try to estimate the return of investment in a dividend paying stock by taking an example.
 
Return Calculation

Let’s take an example of Punjab National Bank and analyze its five year dividend history. Details and relevant calculation for the same is given in the table below.

Dividend Announcement Date	Dividend (%)	Face value	Dividend Amount	Stock Price
09-05-13	270	10	27	783
09-05-12	220	10	22	767
04-05-11	220	10	22	1116
06-05-10	220	10	22	1043
20-05-09	200	10	20	676
15-05-08	130	10	13	537
Total Dividend Earning (Sum of Dividend Amount column)	126
Stock Price Appreciation (Difference of 2008 stock price and 2013 stock price)	246
Capital Appreciation + Total Dividend (Sum of the above two columns)	372

If you calculate the holding period return on the basis of above data, it will be approximately 70%. I have not included the taxation on dividend but tax outgo will be roughly compensated if we consider dividend reinvestment.

 
Stock of Punjab National Bank is just an indicative example to facilitate the calculation related to dividend income. You can find better dividend paying stocks by checking on the dividend history of good companies. Objective of this article is to make you understand the importance of dividend consideration while planning your long term investment and I am in no way recommending or rejecting Punjab National Bank for investment. Just role your sleeves up and do some research as you can find better names.
 
Important Dividend Dates

While analysing dividend, you need to be careful about dividend date terminology for accurate calculation.

1. Dividend Declaration Date – Company Board announces dividend on this date.

2. Ex-dividend date – Till this date, stock trades with dividend. Investors need to buy the stock before ex-dividend date to claim dividend.

3. Record date – Company checks its record to find out the eligible stock holders on this date. Your name should be in the list for claiming dividend.

4. Dividend payable date – Company releases the dividend pay cheques on this date.
 
Conclusion

If you are a believer of buy and hold policy, you should aim for high dividend income as it will definitely increase the incentive for holding the stock for long term.

 
Source: InvestmentYogi is one the leading personal finance websites in India