Dividend Yield Portfolio - for Wife

That is point I made … Dividend Growth Rate … is important metric … When you invest in stocks for dividend …

Dividend growth metric is Fn --> Free Cash flow Gr and willingness of management to share that with shareholders ( dividend Payout ratio ) …

If you were to judge HPCL vs ONGC in 2013 the call was easy , but if you had to judge among power utilities in Years 2013 it would have been difficult … so you would have to create a portfolio of stocks and hope as portfolio you can beat FD income over 5 / 10 years …

Other group of stocks that form critical part of dividend based investing are IT services and FMCG … These stocks have great history of dividend growth …

Now like in equity investing you may again not be correct always … but dividend based investing is easier as benchmark is to beat FD returns or Home rental net income ( income - annual property related expenses ) in 5 / 10 years time frame …

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This dividend distribution business is not minority investor friendly. Dividends are distributed, solely, so that the promoters can take money out of the company coffers. This is precious free cash, if business prospects are far and few, cash can be used to buyback stock, which would be minority investor friendly. If the minority investor wants cash, he can sell the stock himself, it is not so far-fetched.

Promoters cannot sell their holdings to raise cash, therefore, they resort to dividend distribution.

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Doesn’t giving dividends make sense for govt owned public companies? Because they don’t care that they are taxed heavily as all of the taxes go to the govt anyway?
Also, sometimes if a company that has been giving regular dividends reduce the dividends suddenly, their share price gets knocked down.
Also, the guru Warren Buffet likes his dividends from Wells Fargo. Think he got about 1.7bn dollars as dividend from Wells Fargo. He can probably allocate that amount better than Wells Fargo can on its own.

Dividends can make sense if companies can’t reinvest for better returns or can’t buy back their overvalued shares. Rather than investing at a lower return business losing money, would it make sense that they just return the money to the shareholder? Dividend distribution tax and the tax on dividends above 10 lakhs does make it very inefficient though (Triple taxation?). However, this might be better than losing all of the money because of investment in a money losing venture.
Agree that the best option is for the company to reinvest the earnings at higher rate of return and for shareholders to manufacture dividends by selling a small portion of shares if they need it.

Let’s take the example of Bajaj consumer. If you know the profit could double in 5 years, everyone will invest in this business. This is purely because the company is cash flow positive and needs low cash investment to increase its profit. What will the management do in this case? Of course distribute the excess amount as dividend or buy back. The only problem here is that nonone knows whether they can double their profit in 5 years.

Dividend yield investing is as a concept an interesting concept. I think it needs to be taken a step further. At the time of buying, the idea is to look for dividend yield but an eye must be kept on potential optionalities that can occur that can lead to meaningful capital appreciation as well.

e.g Hawkins currently below 3000 and dividend per share of close to 75 per share provides a yield of 2.5%. Now every few quarters it has a couple of quarters that show atleast the promise of growth and gets the market all excited and stock tends to move up 30-40%. During these times one can book profits as well and buy at lower levels. Atleast since past few years this is the pattern I see. Dividend yield provides a floor to prices.

Similarly currently stocks like hero moto with dividend of rs 90-95 per share is available at below 3000 and provides dividend yield of more than 3%. Here too there is an interesting situation. Because of lacklustre sales numbers in last few months/quarters stock price has corrected significantly. Even though it is labelled as a cyclical, looking at Indian markets, it is not as bad as a typical cyclical company. My guess is that after a few months it is likely to regain its mojo and start gaining traction in its numbers. Balance sheet wise, return ratio wise, wealth creation wise, dividend sustenance wise there is very little to worry about.

Similarly Bajaj auto is also similarly situated. Even castrol would make the cut. Bajaj consumer looks interesting. I would not be too keen on PSUs because I would be not too sure about dividends continuing.

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NMDC, NALCO, IOCL are some of the PSUs giving a high dividend yield. They have also been buying back shares. Wonder if these PSUs gets undervalued because of being PSUs or if they deserve their low P/Es. NMDC and NALCO also have very low d/e, p/e.

A few companies buying back shares at say Rs 2000 and then when the shares are selling at 1000 months later they don’t buy back. Does that make sense? Buybacks can be value eroding too.

That is an very interesting and uncomplicated approach to dividends. You have rightly pointed to the possible gains due to inherent market volatility. May I request your views on BSE in this context. It pays dividend regularly and at current CMP, the dividend yield is attractive. The business is highly regulated, long lasting and proxy to growing appetite for equity investments. Exists in a duopoly and is cash rich. Do you think that it can be a good dividend play too? Thanks.

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I think yes… BSE also qualifies with @hitesh2710 sir’s criteria which can provide capital appreciation with good dividend yield and dividend yield of actual investments increasing with capital appreciation.

Had a discussion with few colleagues on this few days back n this what I had done n hence posted (with one minor addition)-
"Frankly, ve spent last few months thinking about dividends not in terms of buying only high dividend stock but how I look at own portfolio from dividend angle as a supporting income streams and ve used this correction to tweak portfolio . Ve tilted towards divided plus growth whenever it comes. Idea is through high dividend either by value or by growth or by buying cheap , portfolio should give 1.5-2% yield so that when think of quitting job , divided stays as one of many income streams. Here is the list I ve (one key thing I ve ensured not to include an industry on directional decline even if dividend is high, a stagnant industry is ok for me n hence oil companies n govt companies ignored ).

Value with missing grwoth - bharti infratel, bse, care, greaves cotton

Dividends with non linear growth where expect dividend to keep on increasing - mcx, swaraj, hdfc amc, all cargo,accelya, persistent, Tata elxi ,iex, ambika

Companies where current dividend looks low but if capex is not reqd will give handsome dividend - nesco .
Companies which are on radar but not comfortable with valuation or yet trying to understand cyclic impact on long term valuation n dividends - Thyrocare, tvs srichakra

Minimum dividend expectation - 1.5%"

Disc : May or may not ve position in one or many of stocks at a given point of time

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Surprised to see no FMCG names…I feel if one wants to invest for stable dividends…nothing better than buying FMCG at their low they make with cyclical markets…in FMCG dividends usualy increase…I once made mistake of investing in HCl infosystem for dividends as it had a 4 percent yield then… only to see the profits erode and so did dividends…in FMCG a 1 percent yield today will become 2 in few years…

BSE has a risk of its business being eaten up by big brother NSE…imagine when that happens with time then in which direction would dividends go…therefore I have learnt never to invest for dividends as they make u chose incorrect business more often than not as the high yield being result of known business risk to savvy investors…pls note I am not saying conclusively that BSE is not good buy…I am just trying to highlight risk of dividend investing…
Better would be to invest in businesses which can generate greater cash year on year and which have ethical management to share a part of it with minority investors which would automatically increase our dividend yield…

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Don’t you think if that was the case…BSE business would already have been eaten up by now as NSE exists since 1994.

I know NSE is more liquid but there is no such differentiating factor which makes NSE Better other than liquidity.

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Rather than investing in a Dividend Portfolio you can invest in large cap companies growing at 15-20 %. These will give better returns in 10 years time than dividend oriented companies. dividend companies pay dividends at the cost of growth.

Pidilite, Britannia, HDFC Bank, HUL le lo…they also give out some dividends…

Sounds correct.

Nifty top 100 has several growth stocks. 15% Cagr with safety of capital should not be an issue. But, the Dividend may not be enough, in which case one could sell a little out of the pf when in profit.

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I heard a lecture by valuation guru Ashwath Damodaran on YouTube where he classifies companies according to where they are in their lifecycle.
New companies that have to yet secure their market burn cash, take debt etc.
Those companies that are past the above stage are growing their capacities, distribution network, launching new products, etc. For such companies, its all about how they manage their finances, the balance between internal accrual and debt etc. Basically project finance.
The third type of company are the old and/or dying companies. Such companies are still growing their revenues and profits at a reasonable clip but its difficult for them to imitate new entrants. The dominant theme here is about returning cash to their investors in form of dividends and buy backs. They may not need large amount of incremental cash (as a percentage of net profits) to further grow business.However they need to do careful trade off analysis when it comes to diversifying beyond their core. Since they are no longer nimble and agile, the diversification may not deliver as high returns as their core business.

So when looking for dividend companies, better have an idea of what life stage are they in. Dividend from large companies like TCS, IOC, etc is one thing and that from mid-caps is completely different thing altogether.

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Yes, what you’ve typed makes sense… Of course it does, Dr.Damodaran after all.

Dividends is the way promoters can get some money out of the company. If a stakeholder in a midcap finds himself financially completely invested in the project, then dividends from that company is the only way he can get some cash in return for his investment.

Therefore, no matter the high tax and using free cash, dividends will always be there.

For a promoter there are many avenues available - outright sale,sihponing, related party transactions, high salary etc etc. Dividend is least efficient of all.

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Selling stock from promoter quota, siphoning, shady transactions, high salary (not all promoters are employed) shine a negative light on the Goodwill of the company… Dividends is the cleanest way.