Sunday, September 11, 2016

What Should Investors Do When A Cash Rich Company Refuses to Pay Handsome Dividends?

When a cash rich company refuses to pay handsome dividends, nor does it undertake share buyback, then there could be two possible reasons:
  1. The company’s management may be accumulating cash for a major acquisition or an internal expansion plan.
  2. The management is downright ignorant and lethargic, though the probability for this is extremely low and remote - such a management will not be able to generate so much cash in the first place.

Even when the company is planning a major acquisition or expansion, it is not justified in not paying handsome dividends to the shareholders. For after all ‘Dividends are the Wages of Investors’ and, the investors should relentlessly pester the management to pay more dividends. This is what Warren Buffett does. He attends the annual general body meetings of the companies in which he has investments and exerts pressure to pay more dividends.

The argument that the company is holding on to cash for a major acquisition or expansion also does not hold any water for history shows that many such acquisitions/ expansions were designed more to pamper the egos of the Chairman or CEO and destroyed precious capital; in a few rare instances top managements had undertaken acquisitions in downright self interest, as their pay is invariably linked to the turnover (top-line) of the company rather than to net profit (bottom-line). In such situation, investors / shareholders are the ultimate sufferers.

In conclusion, not paying handsome dividends in the face of continuous surplus cash generation, for whatsoever reasons, is totally unjustified. The shareholders have to be always vigilant and ensure that ill-conceived acquisition plans are shelved. They should always keep the directors on their toes and constantly pester them to pay more dividends.

Bond Definition


Bond is a type of loan that is broken down into small pieces and issued to the general public. Usually, these are listed on popular stock exchanges and are freely tradable in the open market.

As in any loan, the bond specifies:
  1. Face value of the bond
  2. The rate of interest or coupon rate
  3. Frequency of payment of interest – quarterly or half yearly or annually
  4. Date of redemption or repayment or maturity

Bonds can be unsecured or secured by specific assets or a non-specific, generally secured by overall assets of the company.

Sometimes bonds are issued with an option to the investor to convert the bond into an equity share of the company at a certain pre-specified price. Such bonds are called convertible bonds.

Sometimes bonds are also called debentures. There are subtle differences between the two based on security, purpose and duration but they are different in different countries and many times used interchangeably.

In real investing stocks/ equity is the main investing instrument; bonds play an important but only a balancing role. They act as a counterweight. When stock prices/ stock markets are high you should invest in bonds. In the same vein, when the stock markets are depressed you should switch over to stocks and dump investing in bonds.

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Blue Chip Stocks Slide

Blue Chip Definition

Blue Chip

According to the New York Stock Exchange, a blue chip is stock in a corporation with a national reputation for quality, reliability, and the ability to operate profitably in good times and bad.

From the investor’s perspective, a blue chip is a stock or shares in a company that in addition to having proven abilities, rewards the shareholders handsome dividends regularly, without break, issues bonus shares at regular intervals and generally protects the interests of the investors through conservative management policies like not contracting debt at all are very small debt and so on.