During market meltdowns and corrections, Capital preservation and safety becomes important. Which are the consistent dividend paying stocks and how much % do they pay every year?
Mostly PSU firms. But, even dividend paying stocks can fall if there is a market wide price correction. Instead, you should focus on asset allocation and allocate more to debt if you’re uncomfortable with a price correction in equities.
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But if we consistently add them , will it not be a reasonable strategy? as we get dividends as well as more units of stock, if it falls
If a company pays a dividend of Rs.10/share, the share price would fall by approximately Rs.10 too. Dividends are just cash on the company’s books being paid out to shareholders. Also, the taxation is different, now dividends are taxed as per your slab rate whereas, capital gains are taxed at 10% for long term holdings.
Most companies pay dividends because either they are govt. owned and govt. needs cash and also that govt. doesn’t have to pay taxes. And two, it’s because the company doesn’t have any avenue to invest the cash, such as ITC.
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Am I the only one who doesn’t like dividend paying stocks? I feel they are wealth destroyers.
When a company pays dividend the value of the company falls by an equivalent value. Moreover the amount so paid is taxable in the hands of the shareholders.
But there are so many who look for dividend. So what am I missing here?
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Many people think that dividends and bonus shares are given out for free.
Bonus at least doesn’t make any difference to the fundamental value. Infact liquidity increases. And since the value per share decreases small retailers buy and demand increases. Understandable.
Dividend is beneficial only if you fall within basic exemption limit for taxation.
In my view, it is the psyche of a relatively new investor and especially so when the individual portfolio is falling. When the overall market is on the increase and the individual portfolio is in the green (day gain), the investor is contented and happy. When an investor sees a downtrend (day losses), he starts worrying and as comfort will try to fall back to check on dividend-paying companies and invest in them.
Once he has invested, assume, the overall market will start increasing, the dividend giving companies market price will not increase exponentially vs the others and then investors start worrying if his capital is being efficiently being used. Investor would then think that he should have invested in Reliance instead of ONGC (as an example)
This is a vicious circle, until and unless the investor realizes that the most important thing is to choose the right business to invest in.
Disc: These are my personal views only.
Another probable reason why people like dividend stock is because till last year or previous year, dividends were not taxed in the hands of the investor and they might not be aware of this or they might be quite happy that the sum of all dividends will not exceed their limit.
Again going back to the psyche of an investor when an investor gets handsome dividends, the feeling is, got cash out of the company without selling a single share and hence capital invested is reduced. (I am talking about a naive, retail investor not an expert).
I remember, in Jan 2019, Vednata stock price was around 205 (appro), it fell to its all time low of 61 during the march april 2020 crisis. I did not sell a single share of Vedanta as the dividend yield of this stock was around 15% plus. Vedanta was one of the massive dividend paying company. Of course then the bombshell was dropped of delisting and this is history. Same with ITC, it was 300 prior to the crisis, did not sell a single share because I just liked the company and it fell to 140, but did not bother me. Dividend yeild was quite handsome at that time for ITC.
Disclaimer: Exited Vedanta and holding ITC. These are my personal views only.
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Here we are on the same page. I would want to hear from someone who prefers dividend paying stocks. Anyone to justify?
Buy companies/ shares of companies with strong fundamentals, proper business model n strategy, strong promoters. It’s the board’s decision to pay dividends or to reinvest them …
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I was on the other side couple of years before,
I thought it is free money, even though the value drops by so much, eventually it will come back to cum divided price.
But changed my view ( for short/medium term) after abolition of DDT and it was made taxable in our hands.
But there is nothing fundamentally wrong in dividend giving stocks per se, most of them are PSU, I feel they are good investment choice for a time horizon of 10+ years.
It depends, top dividend giving stocks pay somewhere around 7-8%, still better than FD. But the problem is, if you income is high, 30% of the dividend would go as tax. But if you are looking at a long time horizon, some of them may yield a decent CAGR.
Even before dividend was made taxable in the hands of the shareholder, it was a wealth destroyer. There was dividend distribution tax in the hands of the company. It was around 18 percent. So to pay shareholders a dividend of 100 the companies cash balance reduced by 118. So fundamental value was coming down.
I think people look after dividend-paying stocks for income. Even if the share price drops the investor are comforted with the thought that they will continue to receive the dividends as long as they hold onto those stocks. This thought comforts them and thus they seek out such stocks. Having only some allocation to dividend-paying stocks is no big problem. But when people invest in stocks they look for growth and not for the long term dividend yield. I think some dividend stocks can be bought but the main objective should be capital appreciation.
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Each one has different needs from their investment, and for some dividend paying stocks works for some does not work.
Many people have built a long term portfolio of blue-chip stock over decades and now dividend cashflow is high enough to take care of their monthly expenses. Obviously they will love dividend paying stocks.
On other hand there are people who are making investment for 3-5 years horizon and dividend to them looks like extra tax burden.
Both views are valid.
Having said that, yes with change in taxation, dividend paying stock does lost some of the benefits.
Well that is true if you are mostly looking at PSU stocks alone. But may not be true for all stocks.
In fact you may go to smallcase and look out some of the smallcases like Dividend aristocrat, dividend stars etc. They have actually generated more returns than their benchmarks over a period of time
Also, remember as business matures, avenue for further investment reduces, in such scenario it would be much more preferable to increase dividend payout and pay cash back to investors (that is what most IT companies are doing for past few years) instead of keep investing that cash in unrelated business activities (like ITC, which is using cigarette business cash to fund hotels, fmcg and other businesses with very limited success).
Hope this helps.
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I agree with whatever you are saying. Infact I am also invested in some of the high dividend paying stocks. ITC is definitely one of them. But my decision to invest is not based on whether it gives dividend or not.
You have rightly pointed out that some of the dividend paying companies have outperformed the sector. Very much possible and we cannot conclude on those basis alone. Because we do not know what would have been the return from those companies if they had not paid dividend. May be they would have performed even better. So we need to take the same company with and without dividend. But we don’t get that option.
So let me try putting it this way. We do have same scheme of mutual funds with and without dividend. Try calculating the wealth created under both alternatives. Do consider the dividend payout and capital appreciation. On net basis definitely one without dividend will give better return.
Market prices are determined by big investors. Dividend decision does play a huge role in the pricing of shares. (There are enough theories on the same). If dividend is paid more than what investors are looking for then the prices get adversely affected. What type of investors should company satisfy? The big investors or the retailers. The big investors do not want dividend. If regular cash flow is required you can always sell a portion of your investments equivalent to the amount of dividend you desire.
A company pays dividend because it doesn’t know what to do with the money generated. Like you mentioned the case of ITC. Totally agree. They are giving my money back to me and I have to pay taxes. Since these are usually not growing companies may be I can call them less risky. One reason that I could think of.
PS: I am not arguing against anything that you have mentioned. I understand all that you have mentioned and I know why people invest in them also. Thank you for your views.
Well you wanted counter view, I gave. So wouldn’t go into argument of which one is better. But would definitely like to point out few facts:
Do not compare MF scheme dividend with a company paying dividend. They are two completely different thing and not at all comparable.
TO avoid people getting confused, MF schemes are no longer allowed to use the term dividend. It is now called IDCW (Income Distribution cum Capital Withdrawal)
Another misconception. Since, investor activism is not very well covered in India, it is difficult to get such data. But in west Big investors regularly push companies to increase the dividend payout. There are lot of documented cases of this. I can share one:
Apple in early 2010 was a hoarder of cash and didn’t like returning cash through dividend / buyback.
Carl Icahn, a bilionaire investor and other institutional investors pushed apple to increase payout through buyback and Dividends, which finally company had to comply.
Also, if you think nobody apart from retail cares for dividend, read this, where CNBC claims that apples dividend increase decision is so monumental, it not only affects it’s shareholders but whole of America.
Now there can be lot of arguments and counter arguments about these decisions. All I am saying is, only retail likes dividend and big investor don’t is a misnomer.
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Thank you for your valuable inputs. It definitely makes more sense now than before.
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One small point…
Company hoarding cash can only be justified if the company can give better return above Risk Free Rate it can otherwise earn or more than return from something of similar risk level.
Otherwise the company is a Cash Destroyer.
Also if company is hoardung cash and Return on it is less than Cost of Equity or WACC then too it is destroying value (may be slowly but surely) in long term.
So it is not that High Dividend Payout is bad and Earning Retention is Good. If company can’t use cash it have efficiently, it should return it to the investor.
Now the PSU’s dividend yield and their destruction of value is totally different thing. PSU are forced to pay large dividends to help Govt to fill deficit hole (e.g. Coal India, NMDC, BEL, BPCL etc). This forceful dividend payment in PSUs where Govt is majority (mostly >50%) shareholder hurts companies in long term and they lack cash reinvestment (for Capex or Capacity Expansion). So lack of Sustainable Growth in high dividend paying PSU is a no wonder.
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This is exactly what I was referring to when i mentioned dividend decision playing a role in the pricing of stocks. Also mentioned that only companies who do not know what to do with cash pay out dividend. I didn’t want to get WACC and IRR and complicate stuff. 
Thank you for your views. I really appreciate them.