Profit Sharing Stocks:

Companies share their profits in many ways. One such way is by declaring dividends. Following are a few clarifications for the sake of emerging investors:

• Dividends are paid by companies which make profits.
• Dividends are always paid on Profit after Tax.
• Dividends are always paid / directly credited to your bank account.
• Dividends are always declared as a percentage of Face Value of the share.
• Dividend Yield is the actual return on investment for the investor.
• Dividend Payout Ratio is the percentage of profits paid out as dividend.
• Dividends are Tax Free in the hands of investor.

Among these points, many investors confuse between Dividend percentage and Dividend Yield Percentage. For instance,

• Let us assume a share's face value is Rs.10 and its market price is Rs.230.
• If the company declares 40% dividend - it is 40% of Rs.10 (Face Value) = Rs.4
• If the investor has bought this shares at market price of Rs.230, he would have got Rs.4 as dividend. This would work out to: Rs.4/Rs.230 * 100 = 1.73%. This literal return on investment by way of dividend is called as Dividend Yield.
• No doubt if an investor had bought this share at its initial public offer or subsequently in the market, at its face value of Rs.10, then his dividend yield would be 40%.
• Though the dividend declared is common for all investors for a particular share, the actual dividend yield would vary depending on investors purchase price.
• Dividend Payout ratio actually helps investors in identifying those companies which are willing to share a higher proportion of their profits. Typically these are companies that share their profits. In nutshell we can call them as Profit Sharing Stocks.

Typically equity investing is all about staying for long term and enjoying both capital appreciation and dividend yield. For example:

• Wipro came out with IPO in 1980.
• 100 shares of Rs.100 face value would have been allotted against an investment of Rs.10000.
• After series of bonus and stock splits, the number of shares held against initial allotment is 96 lakh shares. As on 20-Feb-2014, Wipro trades at Rs.565/share, taking the valuation at Rs.542 Crores!!!.
• And Wipro declared 350% as dividend as on 31-March-2013. Face value of Wipro is Rs.2. 350% of Rs.2 is Rs.7. Hence the total dividend received against the holdings is Rs.6.72 Crores!
• And the beauty is this Rs.6.72 Crores is absolutely tax free.

Building up such a dividend yielding portfolio is not difficult. Investors need to invest with clear mind for long term. List of stocks given below was published in Capitaline research. These are stocks which are currently sharing atleast 25% of their profit after tax as dividends. This is only a starting point. Investors need to drill down and check if the stocks are financially sound and with good quality manangement. Our Best Wishes for reaping rich dividend cheques going forward !