For long term investors high dividend yield stocks offer great investment opportunity. These stocks act as safe haven as they provide good returns with greater degree of safety. Even in volatile market condition, an investor gets a decent return on investment in the form of perpetual dividends.The dividends are paid independent of the direction of stock movement generating decent return without losing the ownership of the stock.

Estimation of Returns

Let’s take an example of Allahabad Bank which has declared dividends recently. Five year data regarding the dividend is in the table below:

 

Announcement Date Dividend (%) Face value Dividend Stock Price
07-05-13 60 10 6 126
07-05-12 60 10 6 162
02-05-11 60 10 6 197
30-04-10 55 10 5.5 158
04-05-09 25 10 2.5 73
05-05-08 35 10 3.5 84

 

Total Dividend Earning (Sum of Dividend column above) 29.5
Stock Price Appreciation (Difference of 2008 price – 2013 price) 42
Capital Appreciation + Dividend earning (Sum of the above two columns) 71.5

 

It’s clear from above calculation that if somebody is holding this stock since last five years, his holding has almost doubled. I agree that I have not taken taxation into consideration but at the same time I have not included the dividend reinvestment income in the calculation. In the worst case scenario we will get a return of 8 to 10% on the dividend earning reinvestment which will compensate for the taxation outgo.

Allahabad bank is just an example and there are even better dividend yielding stocks with better price appreciation potential. You just need to do a little bit of research. This calculation shows you must not ignore dividend part while planning your long term investment.

 Different dividend dates

There are four important dates related to dividend declaration and payment which investor should take into consideration

  1. Dividend Declaration Date – Dividend is announced by the company board on this date.
  2. Ex-dividend date - On and after this date the stock trades without dividend. For claiming the dividend investor has to buy the stock one day before the ex-dividend date. If the stock is bought on or after the ex-dividend date, investor will not get the dividend.
  3. Record date - This is the date on which the company checks its records to find out the shareholders of the company. An investor must be listed as a shareholder to claim dividend payout.
  4. Dividend payable date - This is the date on which the company sends the cheques for the dividend payout due to the shareholders.

 

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