Dividend – A term forgotten

Well Off late there has been lot of funds being invested in the capital markets. Every month whenever data on Mutual Funds come; there is one thing common “Highest Ever”. month on month, the funds that are hitting the capital markets are higher than the month before.

What has made that possible?

  • Demonetisation
  • Lower Interest Rates
  • More funds in the financial system
  • Less opportunities in other asset class

One of the most important point out here is the interest rates. However, still a lot of people which will not shift to capital markets. They are the people who are dependent on fixed income for their routine life.

Its always said that equity markets are risky and people with the needs of fixed annuity income should not invest in equity markets and should invest in Bonds / FDs or such other fixed income instruments.

However, one aspect of equity investments is that there is also a choice available to people for annual income and which has always been so to say forgotten and that is DIVIDEND.

The simple reason is that people invest in capital markets for creating wealth and dividend is a very small portion of equity which gets ignored.

However, if someone had to create good annual income out of equity portfolio – it’s possible and could be a decent retirement planning.

Definition of Dividend

A dividend is a distribution of a portion of a company’s earnings, decided by its board of directors, paid to a class of its shareholders.

Quote on Dividend

A stock dividend is something tangible – it’s not an earnings projection; it’s something solid, in hand. A stock dividend is a true return on investment. Everything else is hope and speculation.                                                                                                                                              -Richard Russell

Data of the last 7 years

From the above table, it is clear that the though the annual income (dividend) at the time of investment is far less than the fixed income instruments; the actual dividend received after 8-10 years of investment is significant when compared with the original cost and much better than the FD/Bond Income. In face in some cases, eg. – HPCL and Hexaware, the cost price has been recovered fully only by dividends over the last 7 years and yield is still strong.

In case the table is not very clear, one below chart in connection with Hexaware should make things clearer.

So, what are the factors that one needs to watch out for finding such companies

  • The company should be growing and generating consistent free cash flows
  • The company should not have high long-term borrowings
  • The company in a capital-intensive industry should be avoided
  • Pre-decided dividend policy defined by management

A word of caution

However, there have been cases like NMDC (another dividend yield stock) where the share price has declined during the past 6-7 years due to various factors; though still giving good annual yields, but capital could have been eroded as well and hence investors need to be cautious and do research before selecting such stocks.

Happy Investing !!

Care PMS Team


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