How to Earn Passive Income Through Dividend-Paying Stocks in India

Most people think that investing in stock helps only in capital appreciation, and to cash in the profit, one should sell their holdings. But it is not a smart way to sell the stock if you wish to have a passive income. Instead of investing in growth-oriented stocks, you can invest in dividend-paying stocks and earn passive income.

In today’s blog post, we will give you an overview of how to earn passive income by investing in dividend-paying stocks.

What are Dividend-Paying Stocks?

Dividend-paying stocks are the shares of companies that generally declare a portion of their profits regularly to their investors or shareholders. This dividend can be a regular source of income for conservative investors who are seeking passive income. The frequency of dividend distribution varies from company to company, generally ranging from quarterly to annual. Companies might sometimes declare an interim dividend. PSUs, OMCs, etc., are considered dividend-yielding companies.

Why Choose a Dividend-Paying Stock for Passive Income?

One should choose a dividend-paying stock for the following reasons:

1. Regular Income: Investment in dividend-yielding stocks can be a regular source of passive income for investors.
2. Capital Appreciation: In addition to the dividend, the company’s share value also increases over time. Hence, creating wealth in the long run.
3. No Capital Gain: Dividends can be a source of income without generating any capital gain, as you don’t have to sell your stocks to get the cash.
4. Hedge Against Inflation: Dividend-paying companies increase the amount of dividends based on their profit over time. Hence, a higher dividend yield can act as a hedge against inflation.

Read Also: What is Dividend ETF?

Example of Passive Income Through Dividends

Let’s understand passive income through an example.

Suppose you have invested 10,00,000 in a stock of ABC Limited. For a particular financial year, the company has declared a dividend yield of 2%. 

Then the annual dividend you will receive will be around 2% of 10,00,000.

10,00,000 * 2%

= 20,000 INR.

Hence, you will receive 20,000 INR directly into your bank account.

How to Start Earning Passive Income Through Dividend-Paying Stocks

To earn passive income through dividend-paying stock, one needs to follow the steps mentioned below:

1. Opening a Demat and Trading Account: The next step is to identify a broker, where you want to open a demat and trading account. It is mandatory to have a demat account to invest in dividend-paying stocks. One can select a broker based on various parameters, such as brokerage charges and trading platform.
2. Identifying the Dividend Paying Stock: The first step is to determine the dividend-paying stock in which you wish to invest your money. One can identify a suitable stock using technical and fundamental parameters. 
3. Dividend Yield: Then you need to check the dividend yield of the stock in which you wish to invest. To get higher passive income, one must select the company which has a high dividend yield and has a consistent record of paying it.
4. Diversification: One should diversify their dividend investment portfolio, so that in case of any trouble in a particular sector, another one will compensate for the passive income.
5. Review: Regular monitoring of the dividend portfolio, and remove the stocks whose dividend yield of which are decreased. 

Read Also: 50 Passive Income Ideas in India

Mistakes to Avoid While Choosing Dividend-Paying Stocks

An investor must avoid making the following mistakes while choosing dividend-paying stocks:

1. Looking for High Dividend Yield: One must not only look for high dividend yield stocks, as dividend yield is calculated based on the stock price. And if the stock price falls drastically, then the one-time dividend yield will be high.
2. Fundamentals of the Company: It is required to check the fundamentals of the company. And should not invest in companies having poor fundamentals, such as high debt, decreasing revenue, and profits.
3. Dividend Payout Ratio: One should not overlook the dividend payout ratio of the company. Which means how much percentage of a company’s profit is paid out as a dividend.
4. Diversification: Generally, OMCs and PSUs declare higher dividends. However, it is not advisable to invest in only these sectors; one must diversify their holdings.
5. Tax: Dividends are taxed as per the applicable income tax slab rate. Therefore, one must consider their tax liabilities before investing in dividend yield stocks.

Read Also: Best Dividend Tracker Apps in India

Conclusion

On a concluding note, having a passive income through dividends can be a fruitful decision for a conservative investor. One must invest in stocks with a better and consistent dividend-paying history, along with good fundamentals. You can reduce the risk in your dividend portfolio by spreading it across different industries. One should take this into account as a key factor before purchasing dividend stocks for passive income, though, as dividend incomes in India are taxed according to the applicable tax slab rates. Therefore, before making any investments in dividend-paying stocks for passive income, it is best to consult with your investment advisor.

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