Dividend Investing

I am a big fan of dividend based investing. I have learned and incorporated this methodology of investing after burning my hands in 2008 crash ;-) and reading tipblog. I simply adore this guy.

Anyway coming to the point of investing. I have become great follower of dividend based investing for these few reasons.

1. Dividends provide a steady stream of income: Dividends work as additional source of income on which you can count on (provided your stock selection was good). It is largely different from the movement of the stock prices in the market. During FY09-10 my dividend income was Rs 11,004 (tax free). Secondly a consistent stream of income is always better than money once at a time.
   
2. Dividend stocks prices mostly go up: In my investment experience I have seen that dividend paying companies are always relied upon by many investors and gradually the stock prices go up. In fact I used dividend yield as one screening criterion for stock selection. My recent dividend investment was Tata Steel. I started acquiring it from 475 levels up to 500. My average dividend yield is close to 4%. Since then I have seen a steady rise in the stock price. Currently it has crossed 600 level.
   
3. Dividends increase: Generally big and mature companies become dividend paying companies. We may not see meteoric capital appreciation in such stocks (and truly speaking dividend investing is not much about capital appreciation). Smaller companies need more capital to grow thus cannot afford to pay dividends (and taxes). Big organizations earn lots of profit, thus can afford to share in spite of having growth plans. I generally like companies having 20%-30% dividend payout factor. In my stock selection I have seen that dividends have increased (in rupee value) consistently. I firmly believe that 4% dividend yield will become at least 8% in next 5-8 years. And if India has to grow, interest rates will have to come down in near future. Which security will give me 8% (and increasing) rate of returns after 10 years?
   
4. Dividends have benefit of SIP: Why SIP is good? It is good because if promotes rupee cost averaging. What to do with dividends? In my view dividends should be reinvested as the stock price comes down. This will help increase the portfolio value and with the effect of compounded interest, my retirement will be peaceful.

My recent dividend stock picks: Tata Steel, Titan Industries, IDBI bank