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.

One may question the efficacy of dividend investing in India where managements are not that dividend friendly. Dividends are very small amount and dividend yields are less than even the bank’s CD yields. There are two key aspects that gets overlooked in this approach (1) quality of dividends; and (2) potential for capital appreciation.

1. Every dividend paying company may not be a good option. When following dividend investing, one need to make sure that the quality of dividends paid by the company is good. I use many different parameters like operations cash flow, earnings, payout ratio, dividend growth, debt levels, management action, etc to understand where the dividends are coming from. The dividends should be coming from operating activities and I should be able to figure out its sustainability.
2. Buying at fair value insures that I leave quite a bit of room for potential capital appreciation. It is my belief that as earnings of the company grows, the dividends will grow. The stocks price will also grow along with it. So I am not only getting dividend based cash flow, but also the capital appreciation. If the company is paying you a good quality and sustainable dividends, it is bound to have capital appreciation. It gets added to your total return. I do attempt to project expected return relative to the market based on historical trends.

Furthermore, fundamentally good companies with sustainable operating cash flows (and that pay dividends) will have potentially less downside risk. If you look at recent downturn, there were many companies that did not go down by same levels as markets did. Even if some did go down, they were back on the track with acceptable PE ratios. Examples of such good quality companies are NTPC, ONGC, Nestle, Unilever, Reliance Infrastructure, HDFC Bank, Axis Bank, SBI, Pidilite, Infosys, Hero Honda, Colgate Palmolive, ICI, Coromandel Fertilizers, Monsanto India, Asian Paints etc. These are just few examples.

In fact HDFC Bank and Axis Bank were the two Indian companies that were listed as part of Asia’s dividend aristocrats. These two companies have paid increasing dividends for last seven years.

I hope this post will help understand that dividend investing does not mean sole focus on dividends alone. It’s is a much more holistic process of focusing on total returns.