The stock markets are soaring. Most of the stocks are so expensive. If you have missed the bus, you desperately want to get in. But it's so difficult. You can't afford the high prices. This is when you get a brilliant idea. Why not invest in stocks giving good dividends? These stocks might not be the multibaggers giving you 10 times or 20 times returns, but they do give you a dividend income.
No stocks are considered really safe, but you can bet on dividend paying stocks as defensive plays (defensive in nature). Sure, nothing beats a stock giving really good returns, but if you are taking bets, it would be smarter to bet on a stock giving guaranteed dividend income, rather than a stock which may or may not rise.
So why would you invest in dividend paying stocks called defensive stocks? Defensive stocks do not give you high returns in a rising market, but in a downturn or a market crash, these stocks are generally really stable.
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Stocks which give good dividends are known to fall less than the growth stocks in a downturn, or a stock market crash. They are also a source of passive income. When most youth don't like and should not hold too many defensive stocks, it doesn't hurt having a few of them to protect you in a downturn.
What is dividend income? If a Company shares or distributes its profit with you and other shareholders, it's called dividend income. Dividend is calculated on the face value of the share and not on its market price. Your dividend income is exempt from taxes.
Remember: If you get dividends from a domestic company of more than INR 10 Lakhs, you have to pay tax at the rate of 10%.
Its popularly believed that high dividend income paying stocks give low returns. This is not necessarily true. Many stocks which give good dividends also may give good returns. Another benefit of investing in high dividend yield stocks is that they give these returns at low risk.
Why is this? Regardless of whether the stock markets are rising or falling, stocks paying you good dividends keep paying you these dividends. Many of these Companies declare dividends when stock markets are falling.
The real good Companies pay you a growing dividend.
See Also: Stock Exchanges In India
If you want to generate passive income from your stocks, then stocks paying good dividends are your best bet. It doesn't matter if the stock markets are up or down, you get your dividend income. When you invest in the stock markets, you always think, high returns at high risk. You never say regular income.
Investors who invest in dividend paying stocks rarely sell them. They accumulate more of these stocks when markets crash. This gives dividend paying stocks their price stability.
Dividend stocks give you two clear benefits. They give you a short term income in the form of dividend income. Many of these stocks give decent returns if held for the long term. Dividends are also tax free. Banks are offering less interest on FD's. SBI has cut the 1 year FD rates to 6.5%. Inflation is rising and what returns can you expect from FD's after taxes?
High inflation makes risk free investments less lucrative. Dividend stocks can give you high returns and good dividend income when inflation is high.
Stocks paying good dividends are a great investment. But, there's something you need to remember. You must reinvest these dividends. With the extra money, you can buy more dividend paying stocks. More dividend stocks means more dividends and you can buy even more stocks. So, you need to invest in quality dividend paying stocks. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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