RBI Issues Circular On Levying Unfair Interest Charges On Customers

Brokerage firm Motilal Oswal Financial Services handpicked eight companies across sectors with sound fundamentals, free cash flow and healthy dividend yield.

On the evening of March 31, 2021, most of us got the shock of our lives when the interest rates of small saving schemes were slashed up to 1.1%. However, in less than 12 hours on the early morning of April 1, 2021, the government withdrew the steep interest rates cuts on small savings schemes, citing oversight as a reason.

Commenting on the activity in small saving schemes Kalpesh Ashar – CFP, Full Circle Financial Planners said, “while the government has revoked interest rate cut in small savings schemes. But surely the interest rates in small saving schemes are bound to go down in times to come.”

With the low-interest rate era here to stay everybody is looking for alternatives where they can earn a better return than a fixed deposit. High dividend-yielding stocks can be a good substitute. Let us first understand everything about dividends.

What is a dividend?
A dividend is the distribution of some of a company’s earnings to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. Most companies usually give cash payment in dividends. In short, just the way you earn interest by investing in an FD similarly you earn dividends on your investment in stocks. A company’s dividend is decided by its board of directors and it requires the shareholders’ approval. However, it is not obligatory for a company to pay a dividend.

A company usually declares a dividend when it discloses financial results. A company may declare a dividend quarterly, half-yearly, annually or at all intervals depending on the company’s performance and as per the discretion of the board of directors.

What is dividend yield?

Dividend yield is a financial ratio that measures the quantum of cash dividends paid out to shareholders relative to the market value per share. It is calculated by dividing the dividend per share by the market price per share and multiplying the result by 100. For instance, if a company declares Rs 12 as a dividend and its share price is quoting at Rs 120 then the dividend yield will be calculated as (10/120*100 = 10%).

A high dividend-paying company also means that they are less risky and offer consistent growth along with logging large cash in their books.

With strong fundamentals, these stocks are likely to fall less than growth stocks during a market fall as these companies avoid cutting dividends since it sends a negative signal to the stock markets.

Another benefit of investing in high dividend-yielding stock is the capital appreciation that can lead to wealth creation in the long run. Whereas in an FD capital appreciation is not at all possible.

Let us now look at some of the high dividend-yielding stock that gives better returns than an FD:

It’s an appropriate time to add stocks to earn dividends as the result season is underway and many companies would be declaring their annual dividends along with their results for the financial year 2020-21. But before jumping in the boat, you need to understand four key dates when holding a dividend-paying stock:

Dividend Declaration Date

This is the date on which a company announces the dividends for the stockholders. The press release includes the date of dividend distribution, size of the dividend, record date and payment date.

Record Date

The record date is the date on which your name should be present on the company’s list of shareholders i.e. record book, to get the dividend. Shareholders who are not registered as of this date on the company’s record book will not receive the dividend.

Ex-Dividend Date

After the company sets the record date, the ex-dividend date is set by the stock exchange. The Ex-dividend date is generally two days prior to the record date. In order to receive dividends, you need to purchase the stock before the ex-dividend date. If you buy the stock on or after the Ex-dividend date, then you won’t get the dividend, instead, the previous seller will get the dividend.

This is primarily because T+2 settlement cycle is followed in stock markets in India. This means that it takes two days for a trade life cycle to be completed from initiation to settlement.

Payment Date

This is the date set by the company, on which the dividends deposited are paid to the stockholders. Only those stockholders who bought the stock before the Ex-dividend date are entitled to get the dividend.

(Disclaimer: The above list is for informational purpose only. Before investing, please consult your financial adviser.)