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.

What Stocks to Buy in June 2017?

This month we have liberalised the rules for buying stocks a bit.

Why?

The market sizzling and making stocks highly expensive across the board, and if we don’t loosen a bit we will not be able to:

• Buy anything
• Do justice to some of the good stocks that had suffered price hammering in the global commodity markets.

We have set a liberalised yet strict rules that besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the three criteria prescribed below:

• The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalisation from a stringent 1.00 earlier.
• The Price to Earnings (PE) Ratio shall be below 15. This is again liberalisation from the tough hurdle of 10 earlier.
• The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
• The Dividend Yield shall be more than 0%. However, a mere good dividend yield is not sufficient. In addition, the scrip must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BVcriteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investible sum is taken as multiples of 10,000, that is Rs.20,000, 40,000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 10,000 is equally distributed among the four criteria at Rs.2,500 each or multiples thereof.

This month all the stocks constituting our Portfolio 2K15 qualified, however MOIL Ltd., though managed to qualify after many months, could not earn enough allocation even to buy a single share!

Summary:

Now let us examine the eligible candidates separately under each of the three criteria in detail.

Price to Book Value (P2BV) Ratio:

PE Ratio Criterion:

PE*P2BV Criterion:

Allocation based on Dividend Yield Criterion:

In conclusion the above stocks are those that can be bought in the month of June 2017. MOIL Ltd., though qualified could not muster enough allocation even for buying a single share.