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Dividend and Dividend Yield



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In our earlier, we said that profit-making companies are good to pick.

One of the reasons stated there is that profit making companies can reward its investors with dividends.

In todays lesson, we shall discuss about Dividends and related concepts.

In particular, we shall discuss two terms: Dividend and Dividend Yield.

What is Dividend?

Dividend is...

.. a sum of money

.. paid preferably regularly (typically quarterly)

.. by a company to its shareholders

.. out of its profits (or reserves).

The definition is clear.

It is money that shareholders get just because he invested and is holding the shares.

Dividend = Amount per share given to the share holder as a percentage of Facevalue.

If Facevalue of share is Rs. 10 and Dividend is 6%, the dividend amount the investor gets is 6% of Rs. 10.

i.e Rs. 0.60 per share

In India, dividends can be paid only from surpluses (profits).

So, when a company is paying dividend,

indirectly it implies that it is a profit making company.

But this doesn't mean that every time the company makes profit, the company has to give dividends.

Dividends are paid at the discretion of the company.

So, Investors cannot demand them.

When dividends are paid to investors,

they are tax free in the hands of investors.

So, this is like getting a free pizza!

They are some shares where people invest solely for dividend reasons.

Example: NMDC

I personally prefer dividend paying companies because..

Dividend paying company means

=> Company is making profit (only profit making companies are allowed to give dividend)

=> Company is valuing shareholders by rewarding them

=> Company feels it better pay shareholders than to invest further in the business. May be, company has not found any opportunities.

Isn't REC also good for dividend, it gives 30% Dividends annually

Yes. REC is one of the best dividend paying companies in the NBFC sector.

So, Rule #7: Prefer companies that give *Dividends* to its investors.

Because dividend paying companies are strongly performing over the years, they are getting expensive valuations at most times.

In fact, some investors prefer dividend paying companies over bank fixed deposit rates.

It makes sense to hold one dividend yielding company in our basket of 10 shares.

Having a dividend paying company helps cushion our portfolio during the times of volatile market conditions.

What is Dividend Yield?

Now let us see the definition of Dividend Yield.

Dividend yield = a dividend expressed as a percentage of a current share price.

Dividend yield is also called Dividend-Price Ratio'.

Formula for Dividend yield = Full year dividend / CMP of the share.

Do not worry that you need to do some calculations.

Websites such as Screener.in and other business websites provides this number.

Look for consistency in dividend yield

A good company consistently rewards its investors.

A cunning company pays dividends adhoc to gain investor trust but not really interested in rewarding.

So, Rule #8: Prefer companies that have good Dividend Yield

Units of measurement

Dividend Payout is measured as Rs. per share

Dividend Yield is measured in percentage

  • Why is Dividend Yield important?*

Wont dividend be a sufficient measurement?

1. When two almost similar shares are available, Dividend Yield is a differentiator.

2. Because Dividend Yield depends on CMP,

it reflects the increase / decrease in dividend with respect to the current share price.

3. Low dividend yield can indicate high demand from investors.

High demand drives up the share’s price relative to the dividend.

Assume I am investor who is interested solely on dividend paying stocks.

How do I search for such companies?

There are two methods.

1. Use a ready made screen in screener.in

https://www.screener.in/screens/3/Highest-Dividend-Yield-Shares/

Remember, I am looking for only dividend yield as the only criteria in that screen

I am not looking at other fundamental factors.

So, to find a fundamentally good share, u need to use this dividend yield rule along with others.

In the above example, Helios Matheson market cap is Rs. 23.69. This is very poor !

Similarly, Trinethra Infra has market cap of 1.26 Cr. This is worst!

These are the cunning companies I am talking about. They are inconsistent.

Look at Hindustan Zinc

Market cap: 89,809.15 Cr

Dividend Yield: 13.08

So, may be Hindustan Zinc is a good one

2. Check the portfolios of mutual funds that aim for dividends

I will give u an example.

There is a mutual fund scheme called *Tata Dividend Yield Fund*

That scheme invests solely in dividend paying companies.

Of course, they invest in good quality companies as well.

That scheme looks at consistency in dividend and dividend yield

We can use stock names from that portfolio to invest in dividend paying equity shares.

https://www.valueresearchonline.com/funds/portfoliovr.asp?schemecode=2491

Understood?

Role of Dividend in Portfolio building

When building a portfolio, consider at least 1 stock in your pf with strong dividend payout.

Vikram asked:

while checking high dividend yield stocks on screener I got Noida toll wer cmp is 23 n company giving dividend of 3rs, with this looks nice, but few are telling government may remove toll on that Highway, so in such scenario comes what is the effect on investors,,?

High dividend yield stocks are just one factor.

But if government removes toll on that Highways, companies like Noida toll will suffer a lot.

It is a dent on the business itself.

So, refrain from such companies.

Do not invest in any company in which you do not have confidence.

Assignment alert

Find good profit making, dividend yielding companies from the following sectors:

1. Banks or NBFC

2. Auto or Auto-ancillary

3. IT

4. Pharma

5. Oil, Power or Natural Gas

Question:

  • How reliable are these sites like screener? Can we take the information available from them?*

If we don't like screener, go for moneycontrol or economictimes

Or if you have time, download reports from BSE website or company website and study!

Generally, such websites are reliable unless they show out dated information.

So, check the date of information you are getting when using it from a website

Question:

  • Buying stocks is never the only criteria for a smart investor*

Yes. *never the only criteria* but indeed the first important criteria.

We do not want to enter into troubling stocks and then play with our money to make profits or to get out of them later.

So, better to put our legs into good waters at all times.

If there is a profit making company, it shd be a good one.

If that company is giving dividends too, it shd really be a good one.

All these are matter of personal preferences.

Actually speaking, if you look only for profit making and dividend paying, the list of stocks will come to down to 10%

If you do not want much risk with shares, go look for such companies.

If you are risk taking, any share will do. ;)

What is a block deal - selling or purchasing? What information one can drive from a block deal? Is it a good sign or bad?

@Tiwari: Stocks in which Block deals and bulk deals happen catch our attention because they result in quick upward moment of stock

It might be a good sign for short term or intraday trading but for long term investors, it may or may not be that significant.

If the purchaser of the shares in the bulk/block deal is a long term investor. It helps.

Because he would hold the shares for the long term as well and company will be stable.

But if a trading company buys the shares, they may not hold for long term and then might dump the share at some point or the other.

So, for long term investors, it might not be that critical factor but we surely will keep a watch.

Sir,is there any ideal % which decides that yield is low ?

There is no fixed %age we are look at because:

1. Dividend (and yields) are not consistent across sectors / industries

2. Yields depend on cmp. So change in share price changes yield % every day.

This means that if the yield is even .09 or lesser its fine to decide on this factor ?

If dividend yield is too low and we do not have any other better stock in that sector, then we might have to live with it.

It might mean:

1. The share price went up too much or

2. Profits (and hence dividend payout) is low.

Hi All,

Good Evening!

In yesterdays class, we added few rules and defined few terms.

Rule #5: Prefer companies that have more pros and preferably no cons

It is very difficult to get the ideal (only Pros and no cons) type company.

Rule #6: Prefer consistently *profit making companies*

Rule #7: Prefer companies that give *Dividends* to its investors.

Rule #8: Prefer companies that have good *Dividend Yield*

We need to look for consistent profit making companies - quarter after quarter and year after year.

  • Dividend* is a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).

Dividends can be paid *only from surpluses (profits)*.

Dividends are paid at the discretion of the company. So not a guarantee

  • Dividend Yield* is dividend expressed as a percentage of a current share price.

We can use screener to check the profit, dividend and dividend yield performance of the company.

Yesterday I said:

Low dividend yield can indicate high demand from investors.

High demand drives up the share’s price relative to the dividend.

Allow me to explain it in detail

Assume we have a stock such as NMDC which pays dividends consistently.

And we know, dividend yield depends on the market price.

Look closely at the statement:

Low dividend yield can indicate high demand from investors.

Dividend yield = Annual Dividend / CMP

Low dividend yield means either:

Annual Dividend is low or CMP is high

But we know that the stock gives good dividend yield

So, investors tend to buy such stocks increasing the demand for the stock

Because of increase in volumes that happened with the buying the stock price goes up (temporarily)

So that dividend yield advantage will no longer be there

Conversely high dividend can indicate a share with low demand from investors, which leads to a lower share price

In today's class, we will add few more rules

First I will change Rule #6 as follows:

Rule #6: Prefer consistently *profit making companies*. Look for companies that make profits (in particular operating profit, profit before tax and net profit)

I just elaborated on the type of profits we are looking for from the company.

Do not worry about the terms. I will explain them during quarterly report analysis again.

I already told you,

operating profit = profit from the core business operations

  • Question on Dividend Yield*

Dividend Yield : Annual Dividend / CMP

1)The dividend we are talking here is Final Dividend which is declared at the AGM with the consent of the Board?

Annual dividend is not the correct word I have to use. What I meant is the sum total of all dividends being given by the company during the financial year. So, it is the sum of all dividends (interm + final)

2)In case it is Final Dividend ,the amount of Dividend paid would be fixed till next year end or in case Interim dividend is declared by the Board in mid of the year. but the CMP is dynamic ,in such case CMP would be fixed to the date on which Dividend was declared or would it(CMP) be fluctuating throughout  ?

Dividend Yield is dynamic and keeps changing because it depends on CMP.

3)Low dividend yield can indicate high demand - "does this mean lesser the percentage more investment or greater the percentage more would be the demand .eg : Suppose in a same sector there is Company A having Dividend Yield as 1.20% and Company B having Dividend Yield 2.50% or more ,,,out of A Ltd and B Ltd which Company would have more investors?"

All factors remaining the same, and if we need to choose between A and B, I will for A because it has to scope to cover up for the gap with B. This scope to cover the gap in the yields will generally be temporary and useful for the short term.

However, if other factors are all different and I need to invest for the long term, I will go for B.

1)The dividend we are talking here is Final Dividend which is declared at the AGM with the consent of the Board?

By dividend paying company, it could be interm or final.. Which ever it is. We want company to recognize and pay its investors.

Dividends are proposed by the board but need AGM to give its consent.

2)In case it is Final Dividend ,the amount of Dividend paid would be fixed till next year end or in case Interim dividend is declared by the Board in mid of the year. but the CMP is dynamic ,in such case CMP would be fixed to the date on which Dividend was declared or would it(CMP) be fluctuating throughout  ?

Dividends are never fixed rates. Once announced and ratified by the AGM, it will be paid as soon as possible. The CMP will be adjusted on the next trading day of the record day of the dividend. This adjustment is done only for once.

3)Low dividend yield can indicate high demand - "does this mean lesser the percentage more investment or greater the percentage more would be the demand .eg : Suppose in a same sector there is Company A having Dividend Yield as 1.20% and Company B having Dividend Yield 2.50% or more ,,,out of A Ltd and B Ltd which Company would have more investors?"

Dividend yield is related to the share price. In the above case, I will pick Company B because it gives 2.5% dividend yield.

Why cannot dividend payout be a single factor in selection of growth stocks?

Dividend payout is an important signal of a company's growth strategy and authenticity of profits, but it does not necessarily help predict stock returns.

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