New to stock market investment?
Here’s some advice - think returns not dividends You can invest in companies that offer steady and regular dividends, or you can understand the ratios that will help you make more profitable decisions By Ariba Shahid
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few days ago, a reader suggested we come up with a list showing companies that give out the most dividends as a guide to explain what companies are the best to invest in. However, merely getting some dividends should not be your end goal if you are investing in the Pakistan Stock Exchange (PSX). The goal should be to maximize your returns. Buying stocks of companies that pay pretty nice and steady dividends is one of the best ways to invest on the stock market, especially if you’re not someone that wants to watch their portfolio a couple of times during the day. Before we get back to the list and explain the ratios we’re using and why one list is just not enough, let’s understand what dividend income really is.
What is dividend income?
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asically when a corporation that is publicly listed generates profits, it could either reinvest, retain and save, or share the returns with shareholders in the form of dividend payments. Unlike interest, dividend changes from year to year and
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companies can choose just not to give any. For instance, let’s say a share is worth Rs 50 and the dividend for the year is announced as 5% that means the dividend you will get is Rs 2.5 per share. If you have 1000 shares, you will earn Rs 2500 in dividends. For some investors, earning dividend income is their favorite way to grow and invest. While this is a good investment strategy, one should know that dividends are never guaranteed and companies have the right to decide not to announce dividends or announce less than expected dividends. We will later come around to how this happens more in some sectors and less in others.
when we want to look at historical performance and the track record for a scrip, we look at trailing ratios as well,” says Fahad Rauf, Head of Research at Ismail Iqbal Securities. For the purpose of this story, we will be using ratios derived from Bloomberg. “The estimates for the forward ratios are from Bloomberg. For instance, in the case of the forward dividend yield, Bloomberg takes estimates from various analysts and releases estimates in accordance. They can be right or off depending on whether everything goes as per analyst expectations or whether there is an exogenous shock,” Rauf explains.
What ratios should I look at before investing for a dividend?
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his article isn’t targeted towards those investors that know their ratios well and understand market dynamics. This is a basic finance 101 for those that are new to investing on the stock market and are doing their research. We will look at the forwards and trailing dividend yield, the forward and trailing Price Earnings Ratio, and the trailing Price to book ratio. “The market is forward looking so that is why we look at the forward ratios. However,
Dividend yield
o understand what a forward and trailing dividend yield is, we need to understand what exactly is meant by a dividend yield. Dividend yield is a financial ratio calculated in the form of a percentage that shows how much a company pays out to shareholders in the form of dividends each year relative to its stock price. Because this ratio is based on the share price, it changes as the price of the share rises or falls. This means that the dividend yield will rise when the price of the stock falls, and fall when the price of the stock rises. A forward dividend yield is calculated by estimating the year’s dividend as a percentage
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