In my last post, I discussed about two important but overlooked aspects about dividend investing. Today, I am discussing few tidbit that I have learnt over the years.
Dividends provide stability in your portfolio: Companies that are generating profitable cash and sharing with shareholders are the ones that do not go bust. Even in down market they give you cash dividends. While your portfolio’s capital values go down, your dividends are positive return to you portfolio. I crave for such a scenario. I position myself to make sure I have enough cash to buy such companies at lower valuations. I see downturn such as early 2009 as an incredible buying opportunity.
Dividends to investors cannot be manipulated: Companies demonstrate profit in their books which fuels the market price. But can you as an investor spend company profits? Profits can be generated from financial engineering, ROC or ROE can be engineering, but cash flow from operations or dividends to shareholders cannot be manipulated. As an investor you need cash to spend, and not company profits. The company you work for gives you cash (and not profit statement). Will you be willing to work for profit statement? Probably not!
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There are many different styles, approach, and methods of investing. Many individual investors focus on trading (swing, positional, momentum, speculation, technicals etc.), while many others focus of investing (value, growth, blend, etc), and still many others on special situations (opportunistic, arbitrages, etc). In addition, there are quite a few individual investors that attempt at combination of trading and investing. Similar to glass being half full or half empty, I believe every style has its own pros and cons’ depending upon in what context one is looking at it. Individuals have to figure out what works best for them.
Readers are already accustomed to my approach of dividend investing. I am a long term buy and hold investor and prefer to buy my positions at fair values (fair value calculation methodology). The reason I use fair value is because, I do have enough expertise to determine the tangible book value. While I still use book value based on Graham’s method, it is not the only one on which I base my decision.
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The creation of Pan Asia Dividend Aristocrat index by S&P is a realization that Asian economy (specifically emerging markets) will continue to grow. This is a step in right direction to recognize managements who are prudent in their cash management over a longer term of 10 years and more.
The newly created S&P Pan Asia Dividend Aristocrats consists of 31 corporations. Of these 31 corporations, only five companies are from emerging markets of China, Taiwan, and India. Many readers will view this lack of dividend growth in emerging markets (including India) as shot in the arm saying dividends does not provide significant return. My viewpoint is different. The chart, I presented earlier shows that dividends provide approximately one third of the total returns over 10+ years.
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There are quite a few companies that are confident in their cash flow and profitability that they are sharing increased dividends with their shareholders. I believe this shows management’s confidence in their business prospects going into next financial year. There are many companies, but for now, below is the shortlist of eight companies for this week.
- Visaka Industries Ltd. [2009, Rs 4.00, +33%] [2008, Rs 3.00]
- ADF Foods Ltd. [2009, Rs 1.50 +50%] [2008, Rs 1.00]
- Tilak Nagar Industries. [2009, Rs 2.50, +19%] [2008, Rs 2.10]
- Keltech Energies Ltd. [2009, Rs 2.50, +100%] [2008, Rs 0.00]
- J. K. Paper Ltd. [2009, Rs 1.75, +16%] [2008, Rs 1.50]
- Joyti Structures Ltd. [2009, Rs 0.90, +12%] [2008, Rs 0.80]
- Triton Valves Ltd. [2009, Rs 15.00, +20%] [2008, Rs 12.50]
- ICI India [2009, Rs 16.00, +100%] [2008 Rs 8.00]
Below is the shortlist of companies that continue to keep their dividends flat (i.e. they have neither increased nor decreased compared to last year).
- Everest Kanto Cylinder Ltd. [2009, Rs 1.20, flat] [2008, Rs 1.20]
- Voltamp Transformers Ltd. [2009, Rs 12.50, flat] [2008, Rs 12.50]
- Blue Star Ltd. [2009, Rs 7.00, flat] [2008, Rs 7.00]
- Ajanta Pharma. [2009, Rs 2.50, flat] [2008, Rs 2.50]
- Chambal Fertilizer. [2009, Rs 1.80, flat] [2008, Rs 1.80]
- Zuari Industries. [2009, Rs 3.00, flat] [2008, Rs 3.00]
- Diamines and Chemicals Ltd. [2009, Rs 1.00, flat] [2008, Rs 1.00]
Below is the list of companies that reduced their dividends. As a long term dividend (or income) investor, I would be concerned of these dividend cutters.
- MRO Tek Ltd. [2009, Rs 1.00, -66%], [2008, Rs 3.00]
- Bank of Maharashtra Ltd. [2009, Rs 1.50, -25%] [2008, Rs 2.00]
- Oriental Hotels Ltd. [2009, Rs 9.00, -14%] [2008, Rs 10.50]
- MM Forgings Ltd. [2009, Rs 1.50, -70%] [2008, Rs 5.00]
- Ashok Leyland Ltd. [2009, Rs 1.00, -33%] [2008, Rs 1.50]
I will continue to provide similar updates every week. My end goal is to prepare a list of stocks that consistently grow dividends. We will see how this makes progress.
I am continuously talking about dividends and how I am building my income portfolio around that philosophy. Dividend investing is one of the investing strategies among many other different styles of investing and trading strategies. In addition, I am a believer in two sides of a coin, I am a believer of black, while, and gray, and I am a believer in negative and positives.
Keeping with this, I am not dumb to believe that dividend investing is an ultimate panacea of all investing strategies. Anything that we do in our lives has two sides and we manage it in our own ways. Similarly dividend investing also has its dark side and unfortunately, it is often the focus in many discussions. We need to remove some of the myths associated with it and understand how it can be managed. Following is my attempt to bust some these myths associated with dividends.
We view dividends as are very small. Very low dividend yield (of the order of 1% to 3% only) is cited as being the main reason. It is said that these low yields do not even match the savings accounts interest rate of 7%.
Dividend yield is “dividends paid per share” divided by “stock price”. Now, if the stock price is over valued, dividend yield is bound to be low. If the stock is priced in excess of 20 PE ratio, dividend is bound to be lower than 2%. That does not necessarily mean that dividends have low yield. Stock price is governed by the market sentiment; it does not have any fundamental basis. If you choose to only look at high flyer stocks of the day, then you are bound to feel yields are less. This is addressed by investing in stocks whose dividend yields are based on fair value and earnings of the company. And not based on stock price on any given day, given week, or given year.
In addition, dividend investing is not about present yield. It is about what future yield (or your Yield on Cost) you will end up with. Does this bust the myth? Continue reading rest of this article…
Investing Success Comes from Conviction and Executing Your Ideas
We as individuals focus too much on one or two big time success or multi baggers, but ignore the importance of sustainability and consistency. We fall into the “Chalta hai” trap. Long term success is not built on few multi-baggers. Long term success is built on multiple average successes that are sustainable over time. Continue reading rest of this article…