This is my first post here. I have been reading posts on this forum for close to 6 months and it’s been a great learning experience.
Even though I have been investing close to 2 years, I am still a very novice investor. During my learning curse I was fascinated by one strategy “Dividend Growth Investing”, however could not find any topic, blog, videos, posts anywhere related to this.Whatever I could find is predominantly in US context.
I understand it is not effective taxation wise however this is excellent strategy for someone who wishes to build passive income source and would like to get out of the rat race as soon as possible.
I don’t see too many discussions on this topic in Valuepickr as well. Appreciate your insights on this topic and would love to exchange opinions and learnings.
Note : Self exploration taught me I am not good at picking smallcap stocks or even sector rotation for that matter. I would love to understand the business and hold it as long as possible and which give good dividend over a period of time. This typically makes me lean towards largecap stocks.
Then I guess you have to go through them by yourself, know about the companies’ cash flows, past dividend payout, consistency in dividend disbursal, future business outlook etc, not to mention the appropriate time of entry.
Also I think, the times of building such a pure dividend based passive income PF is not available as much like it did years ago, with bonus shares, splits etc. And if you are young, it might not be that profitable as you have many growth stories to choose from, and the capital is less.
I do have a small component of dividend stocks like Coal India and OIL, but I am not too sure if I want to keep them forever without selling if they are falling when I am in profit, as I know that I can always buy them again at a lower price. So take my views with some salt.
I understand one is better of investing in growth companies when they are young. However, I feel dividend growth stocks can be part of the portfolio but shouldn’t be 100%.
Personally, as I mentioned I am still a novice hence looking into companies and sectors which I can understand and which have high probability of growing their dividends going forward. For the same reason you mentioned above, I am restricting this to 25% of my portfolio and the rest 75% would be in MF’s.
Can you elaborate on when you say the PF is not available for these times?
Of course yes, there can be many ways we can construct a PF, allocating to different ideas and setups.
I have very less experience here, hence quoted the members who are very experienced and have expertise.
From what limited information I have, years ago some investors who had invested in state run PSU companies may have had the advantages of bonus shares, stock splits, and despite some cyclical or seasonal nature, but got tailwinds in the businesses some years, and over the years, the companies may have become very large, so dividend per share has more than compensated the nil price appreciation, not to mention the times the occasional fancy for such stocks. This I am not sure is available now.
If we invest now, will the companies exist for another 20 years, can they keep on generating cash flows, increase payout, grow in size adding zeroes to market cap, do bonuses and splits, and provide a stable stream of passive income.
Let the experienced and experts talk, as I learn from them.
Agreed, uncertainty of the business is there for any kind of company be it growth or dividend giving company.
The whole strategy of dividend growth is based on identitying companies which have a high probability of increasing their cash flows and grow their dividends over that period. It’s not like they give dividends with minimal or nil price appreciation.
However, the companies which typically end up in this type of investing are FMCG, Insurance, Consumption or some asset light business which have higher predictability.
When I started investing having Dividend stock made good sense as dividend tax was zero . In todays world I would not advise any one to do so …
Instead if one has to play dividend stocks theme play it through NV20 ETF which by default selects good companies with decent dividend and dividend flow sustainability ( as it considers P/E and ROCE as additional criteria ) . This index portfolio has 3% dividend and has delivered 19%+ Total return since inception & 18% since last 5 years … Pl look at fact sheet . This ETF is now offered by ICICI , Nippon , Kotak and HDFC
Accumulate when you are in 20s and 30s and in 40s sell small lots monthly … Post tax returns will be far better than any Direct Dividend stocks investment ,
Earlier I used to advice that good time to be full time investor was when your dividend income > 1.2x of annual expenses …
Now I would say when your equity net worth is 30X your annual expenditure … ( I decided to be full time investor when my equity net worth was 60X my annual expenditure … Now I think that was pretty conservative )
Then you can look at such MFs too, apart from going the direct route. There are consumption oriented MFs where there will be growth, and pay dividend. Just a suggestion, I don’t have such MFs.
From what little I know, either this can be played with PSUs with good payout record, with cash flows, or with growth companies which pay good dividend regularly. I chose the first.
So you would not suggest to allocate any % of PF to high dividend yield PSUs now, fresh positions or adding more to the already existing positions? If so, is it because you don’t see the past benefits you have experienced with such companies don’t exist now?
Look at Parag parikh flexi cap fund. Most of their stock selections are growth+ dividend yielding stocks. They have been successful with this strategy and will continue to do well.
Look for companies growing cash flows and paying atleast 20% as dividend yield.
In past Dividends and LTCG weren’t taxed … So game was different .
One has to keep eye on regulation while deciding Portfolio strategy
Today at broad level post tax return on high dividend low growth stocks will be pathetic esp for people who earn other income like salary , interest etc .
But case to case one may enter when individual stock becomes too attractive esp when there are triggers that earning and cash flow will be drastically increase … leading to significant increase in dividend .
Finally to close best way to play dividend stocks now is through MF or ETF by converting dividends into capital gains
Thank you for your insights. While I understand it is tax inefficient, for someone who is starting the capital will anyways be low and dividend as well.
However, investing in stocks which possibly increase dividends year on year along with capital appreciation can help one planning to achieve financial freedom quickly. Most of these companies would be predominantly from defensive sectors but have multiple growth triggers.
One benefit with dividends is they can help during sideways markets with regular increasing income when the capital appreciation is not there.
One more point anyways is I feel capital gains would eventually taxed at par with your slab over a period of time IMO. I don’t know when will this happen, but I certainly feel it will someday.
There is a difference between high yield dividend strategy and dividend growth strategy. Dividend growth is what makes the difference as the dividend on invested capital keeps increasing over a period.
for me dividend growth strategy makes a lot more sense as compared to chasing capital gains.
Its real cash coming in and not just paper gains. Looking at just taxation is a myopic view IMHO.
Its a great tool in financial freedom. One doesnt have to sell/redeem assets (i.e. stocks) to generate income. Why sell something which is growing in value?
Proponents of 4% rule for retirement grossly underestimate inflation and how much corpus is needed. Dividend growing companies generally increase the rate of dividend at a faster clip than inflation
One can do a combination of high yield low growth + mid yield and dividend growth to arrive at an optimum yield on cost strategy (ideally greater than inflation rate)
Dividend growing companies may sound boring however they are cash flow rich, balance sheet strong and are a growing concern (otherwise why would they increase dividends :))
Exactly, Dividend growth investing is mainly about identifying companies with longe term tailwinds which are expected to increase their dividend over a period of time.
Initially these would be peanuts on a overall portfolio, hence tax would be proportional. However, over a period of time they will become substantial and provide us lot of freedom.
Do you have any views on dividend yield category mutual funds, which more or less have the same returns like multi cap funds, to the tune of 15%, over the past 5 or 10 years. SBI fund has an AUM of 4700 crores in 6 months, and their management has spoken very high about the category, that the category can reach 1 lakh crores.
Do you compare these funds with Nifty 50 Value 20, considering the fact that once can accumulate whenever they fall, and sell in the future as need be.
I listened to the SBI MF managers, who said that they also focus on growth of capital, dividend yield growth, sustainability of dividends etc., and as such they choose stocks from large, mid, and even small cap. I haven’t checked individual fund’s benchmarks, but they must be more or less the same, because if all the funds want the above, they have to go beyond the large caps and PSUs, or old economy companies.
I didn’t check SBI MF portfolio as it was launched recently. However when I was evaluating funds a year back so, their portfolios filled with more of financials and growth oriented stocks.
Of course, and MFs PFs keep on changing depending upon various factors and reasons, as we know. If high dividend yield stocks are available at discount, they may cut down their positions of overvalued stocks and allocate more to dividend stocks, all dynamic and relative.
I am just contemplating the idea if such a category can be looked at for long term, and if it can be looked at as a quasi-dividend PF, or complement a pure dividend PF. Hence the question.
