Fundas of Dividend!!!

Dividend,It is just like a "BANDAGE" when markets are bleeding red.

Thats how i see a dividend cheque of a company which has consistent yields and dividend policy.What better than a cheque when everything is going down.It is at this very moment one feels the importance of Dividend paying stocks in Portfolio.

Dividend is a share of profit which company distributes among its share holders. It is done to reward the shareholders for their investments, good will and also to keep shareholders intact. Sometimes special dividends are given like Silver jubilee, extraordinary performance etc.

Dividend yield is obtained by dividing the value of dividend received, in rupees by the Current Market price of the stock.
In India the picture of giving dividends has not been too encouraging as compared to counterparts in emerging economies like China, Hong kong and developed economies like US.There is hardly any NIFTY company which has a dividend yield of around 5%.Tata Motors is one of the good dividend paying companies in Nifty( 4%), HCL Tech., Ambuja Cements etc.
In midcaps the name include Varun shipping , HCL infosystems, BRPL, vijaya Bank, Wockhardt, Castrol, Syndicate Bank.

But one should not only buy dividend paying stocks just because they pay dividends, as sometimes in tough conditions it becomes impossible for a company which does not have sound fundamentals to keep distributing Dividend cheques year after year.So investment decisions should be based on a mix of company performance, profits, dividends, nature of business, sector etc.

An article i read in ET provided the statistical side of benefits of Dividend which can take care of retirement life in a respectable manner::
The portfolio comprised of around 20 stocks across diversified sectors like defensives, cyclical stock with proven track record of past 10 years in paying dividends with equal weightage to each stock.
The calculations have been done from 2002-2003 bear markets when dividend yields improved due to falling Stock prices.( denominator reduces) so it is better to invest in bear markets.
Rupees 30000 invested in 1994 would have given 4300 Rupees till 2008.
But if you have invested since 2002( prior to 03 bear market) the dividend by 2008 would have been around 15000 !See it is almost 3 times the previous case.This has happened as Dividend receipts have jumped in past years .In fact it is even more than capital appreciation in few cases.

For the portfolio selected the dividend CAGR was around 21%.I would say NOT BAD!

But now lets see what happens if the dividends are reinvested for 20 years in a deposit like PPF ( 8% p.a)-
The scale of investment we are taking here is Rupees 200000( 2 lacs). It seems big but what comes out would be even bigger!

Suppose the dividend receipts continue to grow at same rate of 21%, in the first year the payout if around 7000,the yield works out to be around 3.5%,But over 20 years at same rate of growth it works out to be Rupees 3.2 lacs.

But wait,be prepared for the dividend magic along with PPF.

Over 20 years at PPF's rate of 8% investment this net investment of Dividends reinvested in PPF works out to be Rupees 25 Lacs.Whopping 25 lacs in fact!!!
Seeing this figure could make one even forget that this is the Dividend income and it is over and above the capital returns.

This is all for investment benifits,other benefits like TAX FREE INCOME ( both PPF and dividends)are also other lagniappe's.


So this is the time to take note of good dividend paying stocks, see the history and start planning.Equities should not be looked down upon only as trader instruments.