Investing

Creating a passive income stream is a goal for many, and investing in dividend-paying stocks is one of the most reliable ways to achieve it. By strategically selecting dividend stocks, reinvesting dividends, and utilizing specific strategies, you can build a steady flow of income over time. In this blog post, we’ll explore how to choose the right dividend stocks, the importance of reinvesting dividends, and strategies to maximize your income. Additionally, we’ll explain key concepts like face value, dividend yield, and how to use tools like Moneycontrol.com to screen stocks by dividend yield.

What Are Dividend Stocks?

Dividend stocks are shares of companies that pay regular dividends to their shareholders. A dividend is a portion of the company’s earnings distributed to investors. These payments provide a steady income stream, making dividend stocks a popular choice for investors seeking passive income.

Selecting Dividend Stocks

Choosing the right dividend stocks is crucial to building a reliable income stream. Here are some key factors to consider:

1. Dividend Yield: This is a key metric that shows the annual dividend payment as a percentage of the stock price. A higher dividend yield indicates more income per unit of investment. However, it’s important to consider sustainability; very high yields might not be sustainable over the long term.
2. Dividend History: Look for companies with a history of consistent and increasing dividend payments. Companies that have steadily increased their dividends over time are often more stable and financially sound.
3. Payout Ratio: This ratio indicates the percentage of earnings paid out as dividends. A lower payout ratio suggests that a company retains enough earnings to reinvest in its growth, making its dividend payments more sustainable.
4. Company Stability: Invest in companies with strong fundamentals, such as consistent revenue growth, profitability, and a solid balance sheet. Companies with stable earnings are more likely to continue paying and increasing dividends.

Understanding Face Value and Dividends

The face value (or par value) of a stock is its original cost as listed on the stock certificate. While it’s not the same as the market value, it plays a role in calculating dividends. Dividends are often declared as a percentage of the face value. For example, if a company declares a 10% dividend and the face value of its stock is ₹10, the dividend amount will be ₹1 per share.

What is Dividend Yield?

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is calculated using the formula:Dividend Yield=Annual Dividend per ShareCurrent Stock Price×100\text{Dividend Yield} = \frac{\text{Annual Dividend per Share}}{\text{Current Stock Price}} \times 100Dividend Yield=Current Stock PriceAnnual Dividend per Share​×100

For instance, if a company pays an annual dividend of ₹2 per share and its current stock price is ₹50, the dividend yield would be 4%. This metric helps investors understand the return on investment they can expect from dividends alone, not accounting for potential stock price appreciation.

The Importance of Reinvesting Dividends

Reinvesting dividends means using the dividends received to purchase more shares of the same stock. This practice is crucial for building wealth over time due to the power of compounding. When you reinvest dividends, each new share purchased also earns dividends, leading to exponential growth in both the number of shares you own and the dividends you receive.

Strategies for Maximizing Income from Dividend Stocks

1. Diversification: Don’t put all your money into one stock or sector. Diversify your portfolio across different industries and geographies to spread risk.
2. Focus on High-Quality Stocks: Invest in blue-chip companies that are leaders in their industries and have a strong track record of dividend payments.
3. Keep an Eye on Dividend Growth: Look for companies that not only pay dividends but also have a history of increasing them. Dividend growth can significantly boost your income over time.
4. Use Dividend Yield as a Screening Tool: Websites like Moneycontrol.com offer tools to sort and filter stocks by dividend yield, payout ratio, and other financial metrics. This helps you identify potential investments that meet your income goals. You can use these tools to compare dividend yields across various sectors and find the most attractive opportunities.

How Websites Like Moneycontrol.com Can Help

Websites like Moneycontrol.com provide comprehensive financial data on stocks, including dividend yields, payout ratios, historical dividend payments, and more. Using these tools, investors can:

• Screen Stocks by Dividend Yield: Find stocks that offer attractive dividend yields, helping you identify potential income-generating investments.
• Track Dividend History: View a company’s dividend payment history to assess its consistency and reliability in paying dividends.
• Analyze Financial Health: Access key financial ratios and reports to evaluate a company’s overall stability and ability to sustain dividend payments.

Conclusion

Investing in dividend-paying stocks is a proven strategy for building a passive income stream. By carefully selecting high-quality dividend stocks, reinvesting dividends, and using tools like Moneycontrol.com to analyze and monitor your investments, you can create a reliable and growing income stream. Remember to focus on companies with a strong track record of dividend payments, sustainable payout ratios, and stable financials to maximize your success in dividend investing.

Happy investing!

You can start by opening a trading and Demat account with Zerodha if you are from India.

Exchange Traded Fund

In this blog, we will briefly discuss about the ETFs and their different types with a comparison to Mutual Funds.

What are ETFs?

• They are created to replicate an Index.
• ETFs are listed and traded on the Stock exchanges.
• There is option of putting limit orders.
• We get the Delivery of ETFs in our Demat account.

Types of ETFs

• Index ETF — Track the benchmark like NIFTY & SENSEX.
• Gold ETF — Tracks precious metals like gold, silver, etc.
• Sector ETF — Invests in stocks specifically in 1 sector.
• Bond ETF — Invests in bonds like treasury bills, corp, etc.
• Currency ETF — Gives exposure to foreign exchange (forex).
• Global ETF — Invests in global stocks like Apple, Tesla, etc.

ETFs vs Mutual Fund

Few ETFs

• Nippon India Etf Nifty Bank Bees
• Nippon India Nifty 50 Bees Etf
• Icici Prudential S&P Bse Sensex Etf
• HDFC S&P BSE Sensex ETF
• Nippon India ETF Nifty Next 50 Junior BeES
• Nippon India Nifty Infrastructure Bees Etf
• Motilal Oswal NASDAQ 100 ETF
• Mirae Asset NYSE FANG+ ETF

In this blog we will break what all constitutes fundamental analysis. Fundamental analysis is usually used by investors and is a useful skill to master.

Introduction - Fundamental Analysis

Annual Report

1. Qualitative

• Corporate governance
• Moat of the business
• Competition landscape
• Regulatory environment
• Promoter background

2. Quantitative:

• Profit & Loss
• Balance Sheet
• Cash Flow

Mindset of Investor

Trader: Design trade.

Speculator: Gut feel, Friend told.

Investor: Does deep down fundamental analysis.

How to read annual report of a Company

• Download from the company website.
• Includes financial and non-financial.
• Figure out your main area
  1. Management Discussion & Analysis.
  2. General Shareholder Information.
  3. Consolidated Financial Statements.
• Management Discussion & Analysis
  1. Business Strategy of the Company
  2. Growth Prospects of the Company
  3. Risk that the company faces.
• Insight into corporate governance
  1. Director’s Background
  2. Director’s Remuneration
  3. Shareholding Pattern
• Consolidated Financial Statements

Understanding P&L Statement

1. Revenue (Top Line)
   Total Income = Revenue from operation + Other Income
2. Expense: Raw materials + Salary paid to the Employees + Depreciation & Amortization + Interest Payments + Electricity & Rent + Power & Advertisement.
3. Operating Profit = Revenue − Expenses
4. Tax: Profit after Tax (PAT: Final Profit or Bottom Line)
   PAT = Operating Profit − Tax

Understanding Balance Sheet

• Year on Year basis
• Two broad sections: Assets & Liability (Both are sub-divided into Non-current and Current)
• Non-Current Assets
  1. Have a long-term economic benefit to the company.
  2. Includes: Tangible Assets (Like — Property, Plant & Machinery) and Intangible Assets (Like — Trademark, Patent & Certificate, Financial Instruments)
• Current Assets: Economic output within a year time frame.
  1. Inventories: Finished goods ready to be sold. (Dig Deep)
  2. Trade Receivables
  3. Repayment of Loan by others to them
  4. Cash & cash balance held with the Bank
• Non-current Liabilities: Financial obligations which can be fulfilled within a few years.
• Current Liabilities: This should be fulfilled within a year.
• Equity Liabilities: 2 Parts — Share Captial + Reserves & Suplusses(Profit from P&L)

The Cash Flow Statement

• It gives the exact cash position of a company
• Three Activities a company can conduct: Operating + Investing + Financing. Sum total forms cash statement
• Generate or consume cash
• Operating Cash: Represent the core operation of the company.
• Investing: Capital expenditure: New plant, acquisitions.
• Generate Cash: Positive Cashflow
• Consume Cash: Negative Cashflow
• Financing: Borrowing from banks, paying out dividends.

The Connection between Balance Sheet, P&L and Cash Flow Statement

All three are deeply connected.

P&L: Revenue + Significant Expense + Effective Tax Rates+ PAT

Balance: Borrowings +Account receivables + Cash available at hand or banks

Cashflow: Cashflow from Balance + Investing + Financing Activities

Financial Ratio Analysis

Metric that helps in understanding the financial health of a company. It is divided into 3 broad categories — Profitability ratio, leverage (or solvency) ratio, and valuation ratio.

The profitability ratio helps us understand the profitability of the business. Profits are important to expand the business and pay dividends to shareholders. To analyze a company on the basis of this ratio, ensure that the PAT margin and EBIDTA Margin are trending upwards and are stable.

Some of the Profitability ratios are:

1. Operating Profit Margins (OPM)
   Percentage of profit a company produces from its core operations. Calculated by calculating the EBITDA (Earning before Tax, the interest cost, depreciation & amortization) of a company.
   EBITDA = Total Income − Total Expenses
   OPM = EBITDA ÷ Revenue from operation
2. Net Profit Margin
   Calculate the percentage of profit a company produces from its total revenue.
   PAT Number ÷ Total Income
3. Return on Equity (ROE)
   The ratio measures the efficiency with which a company generated profits from each unit of shareholder’s equity or capital invested.
   The higher the ROE, the better it is (>25%). A company should not have much debt as it can skew the ROE number.
   It is different for different sectors. Like IT company has a very high ROE as they don’t have to re-invest more as compared to a manufacturing company which has a low ROE.
   ROE = Net Profit after Tax ÷ Shareholder’s Equity

The leverage in the context of the balance sheet refers to the debt that a company has taken from the bank to run its operation. It is also called the Solvency ratio. This ratio measures the operational efficiency of the business. Some of the leverage ratios are:

1. Interest Coverage Ratio
   Helps us understand how much the company is earning wrt the interest burden it has.
   This ratio determines how efficiently a company repays interest on its outstanding debt.
   Higher the better(>1).
   Interest coverage ratio = EBIDTA ÷ Finance Costs (Interest Obligations)
2. Debt to Equity Ratio
   D/E = DEBT ÷ EQUITY
   A measure of the total debt of the company against the total shareholder’s equity in the company.
   Minimum the best. Lower than 1 is better.

The valuation ratio compares the stock price with the valuation of the company to get a sense of how cheap or expensive a company’s stock is. Popular valuation ratios are:

1. Price to Sales
   Helps to compare the stock price of the share with the sales per share. Higher associated with PAT margins.
   Ratio = Current Share Price ÷ Sales per share
2. Price to Book
   Book value = Tangible Asset − Liabilities
   It is simply the amount of money that is left on the table after a company pays off all its obligations.
   Book value = Total Equity ÷ Total Outstanding Shares
   PB = Share Price ÷ Book value
   A higher price to book value ratio signifies that the firm is overvalued wrt the company’s equity/book value.
   A lower price to book value signifies that the firm is undervalued wrt the company’s equity/book value.
3. Price to Equity
   Earnings per Share (EPS) = PAT ÷ Total Outstanding Shares
   PE = Share Price ÷ EPS
   For every unit of profit that a company generates the market participants are willing to pay PEx (times) more to acquire the share.
   Compare to industry-specific.

Compare the financial ratios of a company to its peers to have a better understanding.

How to value a company

Very elaborate process. The different techniques used

1. Intrinsic valuation
   Discounted Cash Flow analysis Model (DCF): It considers Free cash Flow and Growth rate of cash flow and risk.
2. Relative valuation
   Used when there is no positive free cash flow.
3. Option based valuation

Investing Checklist

Gross Profit Margin > 20.

Revenue

EPS

PAT

Debt

ROE = 20–25 %

Business diversity of a company

Be reasonable with your expectations.

New Fund offers in mutual funds are like IPO for shares, where the fund houses come up with an investment proposal and public can subscribe to it.

What are NFOs?

• An NFO or New Fund Offer is offered by Asset Management Company (AMC).
• It is an invitation to the investors to subscribe to the units of a newly launched fund.
• These are launched to introduce a new investment theme that any of AMCs existing funds do not offer.
• A contribution is made to the pool of investment that is yet to be invested by subscribing to NFO.

How to Analyse an NFO (Checklist)

• Asset Management Company (AMC): Good experience (At least 10 years), Good growth in its Asset Under Management (AUM), Lower expense ratio, Good portfolio of existing funds.
• Fund Manager
• Investment Strategy: Does the offering meets your investment needs (theme).
• Load: Different funds have different exit loads.
• Risk and Return Potential.

What are pension funds? How are they useful?

Have you ever thought of what you will do after your retirement from work generally at the age of 60? This question will have different answers for many people. Some people will just stay away from any work and enjoy the time with their families, children and grandchildren. Some will keep running small errands to earn their living and the rest might have to depend on their children for their various needs that might arise in their old age.

Nevertheless, whatever the answer might fit your case, it is always better to remain financially independent even after the retirement.

National Pension Scheme(NPS) was started in 2004 by the Govt of India for the Govt Employees but in the year 2009 onwards it was thrown open to all the individuals who are in between the age of 18-60 years. It is regulated by the Pension Fund Regulatory and Development Authority.

For more information on regulations you can check out here – NPS

Are you an office going person, or doing work from home(WFH) these days from morning to evening and do not have much time to look for what is going in the market, and are looking to find some avenues for investing your funds/savings/assets in some asset classes for excepting a better return, then this the right place for you. After reading this page, you will understand the basics of Mutual Funds and how you can invest in mutual funds of various categories.

What are Mutual funds ? Mutual Funds is a mixed bag of various asset classes or financial instruments. Based on the type of the asset class or the financial instrument, mutual funds can be classified into different types-

• Equity Mutual Funds
• Debt Mutual Funds
• Hybrid Funds ( Equity + Debt Funds)

Let us check out in detail about these funds.

Equity Mutual funds – In these funds, the fund managing company also know as the Asset Management Company(AMC) takes the amount from the customer, and invests the amount in the equity shares of various companies of different sectors. The percentage allocation in different shares is decided by the fund manager of that fund to maximize the return on investment for its customers. These funds are High Risk and High return funds as they are susceptible to the fluctuations in the market, but in the long term, they can generate a good return for your wealth creation and future lifestyle goals.

Debt Mutual Funds – These mutual funds are the low risk, low return funds usually preferred by the conservative investors who wish to invest their savings in some safe instruments which are always increasing. In such type of funds, the fund manager invests the amount into various Debt instruments such as the Govt Securities issued by RBI, Reverse Repo Rate Instruments, State/Central Govt Treasury Bills, Bonds etc. These funds move slow and steadily but at a constant pace and are considered as the most safe funds.

Hybrid Funds – These are not a separate category fund but it is a mixture of the above two funds in certain ratio such as 50:50 or 60:40 or anything chosen by the AMC or the fund manager of the fund. They are the most popular funds for those type of investors who want a high return but also don’t want a high exposure for risky funds.