Introduction – A potential client came up to me regarding the investment. However he insisted on using the Dividend Investment Philosophy. Let me share you the perspective which I shared with him.
I won’t be starting (or rather copy/pasting ) the article with the definitions relating to dividend investing.
Hope you know and understands the basic concepts like – what do you mean by Dividend/Dividend Payout Ratio/Dividend yield, Why companies pay out of profits, What is better paying out dividends or reinvesting the cash in the Company, and all such related stuff.
I hope you have done your homework and knows the basics of dividend investing. so I will simply straight away jump on the practical applications of dividend investing India.
In stock market each and every information is discounted.
Historical Dividend Information –
If a dividend paying Company has a good track record of paying consistent dividends over a good number of years then (like you) everyone knows this thing.
The market participants has already incorporated the information in the form of higher stock price.
Ultimately there’s no edge in choosing the stock and doing the research based on dividend history.
There are some beautiful companies in US Stock market which provides the Constant Dividends/Payout Ratios over decades. You can safely invest in those companies rather than looking for Balance Mutual Fund.
Forward Looking or Expected Dividends in the Future
Why stock investing in India based on dividend investing principal is not advisable?
High Inflation –
We live in a developing country where high inflation is normal condition. You must consider the Inflation adjusted Real Yields rather than Nominal yields.
Assume 6% to be the normal inflation number for India. Simply subtract the 6% from the dividend yield to get the real dividend yield number.
That number will be very small for single digit dividend yielding stock.
Underlying Assumption in Dividend Investing –
Stable Business and Predictable,Consistent Cash Flows. We do not have a single Company which meets both conditions.
Our Banks are facing problems of NPAs, IT Companies with adaptability to new age technologies (machine learning, artificial intelligence, cloud computing and others), Commodities with management issues, Utility/Energy Companies with political interferences. Every business having some form of business problem.
In nutshell, Dividend investing philosophy assumptions are not possible to be met with certainty. Hence you it can not be relied upon.
Totally Drop the Dividend Investment Philosophy?
No. Absolutely Not. You must use it. Only question is How?
This investing philosophy should not be used as primary and only tool for choosing the stock but rather it needs to be in supportive of other factors.
Check this Economic Times Link –
Dividend Yield is the ratio of Stock’s annual dividend divided by Stock Price.
- Numerator is not constant because of constant business operations.
- Denominator is not stable. Check the Stock Prices chart below.
So whatever the % amount comes up, it won’t represent the true picture.
The best idea would be – Get the stock when it is at the bottom of the channel. Business is in great deal of trouble and the stock has been beaten down badly from the top and all sort of news news are coming for the Company. Starting point has to be those and during research using the dividend investment philosophy as small component in decision making.
Hence, we will be looking for ONGC when Crude oil at $20-$40, looking at REC,PFC when very less clarity on the growth prospects of T&D Companies, Coal India when commodity prices are at low…..Make the combination of (Contrarian Investing+Dividend Investing).
Dividend Investing works good in conjunction to other philosophies but not standalone.