Monday, April 25, 2016

Buy Top Dividend Stocks as Dividends are Investors Wages

Investor Happy at Dividends Raining from His Investments
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.
NLC Ltd.

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.