Dividend-Definition

Dividend is the reward or return a company gives to the shareholders for the money they had invested in its share capital. It is somewhat similar to the interest a borrower pays to the lender for the money lent, though in reality there is a vast difference between both.

As generally there are two broad categories of share capital, namely equity and preference, the dividend payable on these two categories is also classified into equity and preference dividend.

What an Investor Must Avoid: Invest in Haste - Poem on Investing and Dividends

Invest in
Haste is
A Total Waste;
Nay - a Misery Taste.

Test,

Rest and

Reap the

Dividend

Best;

Value Invest!

What Is The Difference Between Dividend and Growth Fund. Which Is Better?

A very useful question. Before going to the question of which of the two is better, let us first understand both briefly.

Dividend Funds:

They pay regular dividends to subscribers. Dividend is the reward paid by a company to its shareholders for investing with the company. Mutual funds borrowed this concept and have started paying the unit holders dividends at regular intervals. The dividends are supposed to be paid out of profits, however in the absence of adequate profits, many of the mutual funds follow the undesirable and obnoxious practice of paying dividends out of capital invested, thereby diminishing the actual money invested.

Growth Funds:

Growth funds on the other hand do not pay any dividends. They plow back the profits for purchasing more shares and thereby increase the price or market value of the units. Since the market value of the units are supposed to grow more. Because of reinvesting the profits instead of paying them as dividends, such funds are called growth funds.

Coming back to your question which kind of SIP is better, I will recommend the Growth SIP Fund for two reasons, as follows:

1. In long term investing, all incomes earned must necessarily be reinvested. Though the investor has the choice of reinvesting the dividends received herself, she may be tempted to spend the income, instead. It is better for the fund itself to reinvest the profits on behalf of retail investors.
2. In the light of the highly undesirable practice of paying dividends out of capital, it is advisable to invest in the growth fund where the question of paying dividends does not arise at all.

I hope I have answered your question adequately, Happy Investing!

Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also and therefore posted here.

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What is Dividend Yield?

It is not uncommon for readers of newspapers to come across companies listed on stock exchanges to come out with advertisements proclaiming their stellar annual results. These advertisements may most probably include an item on dividends stating, “Annual Dividend 300%”. While the reader may be awestruck by the large percentile number, some may not have actually understood its actual import. What is a dividend, annual dividend paid and dividend yield? Let us examine in the following paragraphs.

Dividend:

Companies exist to produce products and render services to satisfy the needs of people. In the process of meeting customer needs, corporations also strive to earn profits and distribute a portion of the profits to the shareholders in the form of dividends. In other words, dividends are the rewards to investors for having invested in the company.

Quantum of Dividend:

Dividend paid can be expressed in many different ways; as an absolute figure like $350 million or as a percentage of the total net profit of the company, 30% of the net profits or as dollars per share, say $0.50 per share or finally as a percentage of the nominal or face value of the share, say 300% of the nominal value of the share, which was the subject matter of the above sited advertisement.

Dividend Yield:

The quantum of dividend expressed in various ways is of little significance to the investor unless it is translated into a relationship to the price paid or amounted invested.

Let us examine the dividends paid by two companies, NMDC Ltd.  The following data is extracted from the website of the popular financial newspaper, ‘The Economic Times’:

The face value of NMDC’s share is Rs.1, which means that the company paid Rs.1.50 and Rs.9.50 per share to shareholders on the two occasions for the financial year 2015-16.

The current market price of the share is Rs.100 on 29^th July 2016 and therefore the website shows the dividend yield of 11%. The yield has been obtained by applying the formula:

Dividend Yield = (Total Dividend Received ÷ CMP) × 100

(Rs.11 ÷ 100) × 100 = 11%

The website calculated the yield based on the current market price of the share as the site is not an investor, does not hold shares, does not have a cost of investment, therefore.

However, an actual investor has a cost of investment, being the price paid while purchasing the share. Suppose an investor had actually purchased NMDC shares at say at Rs.83 apiece, the dividend yield is:

Dividend Yield = (Total Dividend Received ÷ Cost of Investment) × 100

(Rs.11 ÷ 83) × 100 = 13.25%

When different numbers of shares were purchased at different prices, then we take the weighted average holding cost as the cost of investment for calculating the cost of investment. Let us assume that an individual had purchased 100 shares at a price of Rs.126 and another 200 at Rs.100, the weighted average cost of investment will be:

Purchase 1	100	126	12,600
Purchase 2	200	100	20,000
Total	300		32,600

Weighted Average Cost of Investment = 32,600 ÷ 300 = 108.67

The Dividend Yield for this investor will be:

(Rs.11 ÷ 108.67) × 100 = 10.12%

Thus, ‘Dividend Yield’ is a very important metric with which an investor is able to measure the return on his investment from a particular stock or scrip.

Buy Top Dividend Stocks as Dividends are Investors Wages

Investor Happy at Dividends Raining from His Investments

It is advisable to buy top dividend paying stocks as dividends are the wages of an investor.

How so?

Because, investing, especially value investing, is like farming.  It involves a lot of hard work, patience and character.  So, an investor deserves wages for her labor, and dividends are exactly the wages she deserves.

Stock traders/ day traders are solely focussed on price movements.  Many speculative Indian investors, for whom share market is complementary alternative to a real estate market, are also interested purely in the price rice.  They totally ignore the importance of dividends.

Many listed companies too play on the same theme.  They either do not pay dividends at all or pay a paltry a dividend, on the grounds that they are reinvesting the cash for growth, for the benefit of shareholders.  The supposed logic is that:

1. The company knows how to reinvest cash and generate more rewards better, than the investors.
2. The growth created by the company by reinvesting the cash, instead of distribution by way of dividends, invariably results in an attractive increase in the price of the share, and the investors are ultimately better rewarded in the long run through growth, rather than through dividends paid today.  

However, as the Value Investing Gurus like Benjamin Graham and Warren Buffett have observed, such companies, in the delusional pursuit of growth, may sometimes make huge and serious blunders, and the company may go bust.  In the end the investor losses everything, having neither received a dividend when the company was doing good nor recover the capital invested, as the shares are worthless after the bust.

Therefore there is absolutely no justification for the companies for not paying dividends or paying meagre dividends.

Top Dividend Paying Stocks

There is a lot of criticism of government/ public sector companies and praise of private genius in the media. I too had been a strong critic of the performance of public sectors companies.  However, I was surprised to find that in India a lot of public sector companies are doing very well and distributing dividends over 30% of their net profits.  The reasons for the generous dividend distribution may be attributed more to the coercion by the government to distribute higher dividends to meet its own fiscal needs, than the generosity of the managements, but whatever may be reasons, ultimately the investor is benefitted.

One of the best examples is NMDC Ltd.  The dividend yield of this company is about 10%, tax free. At a maximum tax rate of 33%, this translates into a return of nearly 15%.  This is a fantastic return in addition to capital appreciation (increase in price of share).  What kind of a financial instrument can offer such a return?

I present here a list of high dividend yield stocks, that also satisfy other stringent value investing norms:

Name of Stock	Dividend Yield
Hindustan Zinc Ltd.	12.56%
SJVN	7.03%
NLC Ltd.	6.92%
NHPC	5.67%
NMDC	4.56%
NALCO	4.31%
ONGC	4.29%

On the contrary there are innumerable, excellent private companies, which are highly stingy in paying dividends.  Their managements may be thinking that their policy is in favour of investors, but either knowingly or unknowingly they are doing a great disservice to their investors.

A value investor must only include those companies in her portfolio that pay generous and regular dividends, without a break.

In conclusion, as Benjamin Graham advised, only buy top dividend stocks as dividends are investors wages. Carefully build a portfolio of top dividend paying and high dividend yield stocks.