Dividends are basically sum of money paid periodically or quarterly to its shareholders from company’s profit. In simple terms, if you own shares of a company which pays dividend then you get dividend in the form of cash. Which further goes into your savings or trading account. Accordingly, you can earn money after the announcement of dividend if you are holding on to those shares
Thus, you receive the monetary return based on the number of shares you hold, i.e. the more shares you have, more money you can earn. For example, recently PTC India Ltd declared Rs. 4 dividends on each equity share you hold. This means if you are holding 10 shares of PTC India Ltd., you get Rs. 40 in the form of dividend. And this is how some people really make a fortune of the stock market. So, if you have a good amount of investment in dividend paying stocks then you can make decent living simply from the dividend.
There are certain issues along with this because people get attracted towards high dividend paying stocks. Now in market you make money from two different ways. First, the dividend itself and another way is through the appreciation in the price of stock. So, if stock price is increasing or going upside then also you make money. But when stock goes down, you lose the money. You need to find out the stocks which are appreciating and at the same time paying healthy dividend.
Risk Involved in dividend paying companies?
Many people get failed into high paying dividend stocks where they are very speculative and risky. They look for dividend yield ratio and get attracted towards the stock. Many times, dividend paying companies start falling drastically. So, in this case why would anyone want to invest money in such stock where dividend earned goes out?
High paying dividend stocks or high paying percentage rate is not just important as many of the stocks continue to depreciate. That is because they are compensating for the appreciation factor. Companies like apple under pay their dividend, some companies don’t even pay dividend they believe that the stock appreciation is what investor want. So, if you are looking for a dividend place and stability you need to find out such companies. Companies that are stable and paying out dividend consistently.
The reality is that the more companies pay dividend more they must compensate for their share price. Further they either compensate the potential depreciation in that stock.