Best strategy for investors is to buy shares of reputed companies that pay dividends regularly and without any cut.
WHY J&K Bank paid crores of rupees to Omar Abdullah? What is dividend? These were two blunt questions posed to me by my toddler – a primary class student. Basically she was referring to a photo which had appeared on the front page of this newspaper showing J&K Bank Chairman Mushtaq Ahmad presenting two dividend cheques worth Rs.67 crores to the state chief minister Omar Abdullah. Even as she could read out the word ‘dividend’, she wasn’t able to comprehend the meaning of dividend. To explain the meaning of dividend, I narrated a tale of one of my acquaintances who is a share holder of the bank and has been receiving dividend every year. I could have narrated the definition of dividend, but it could have confused her to understand it in the context of financial world. And we all know how complex is the financial world to understand if not experienced practically. And complex things turn easy when narrated in a story format.
The curiosity shown by my toddler to know about the dividend reminds me of an acquaintance who, despite not having a faint idea about share market, turned out as a value investor. He had parked Rs.3,800 with J&K Bank in 1998. He was lured to invest the money in the JK Bank shares through initial public offer (IPO) in1998. His shortcut understanding of the IPO of the bank was that his money would double in less than 5 years. However, he was least bothered about the risk involved in the investment, as he had faith in J&K Bank. He was allotted 100 shares by the bank. I remember when news about listing of JK Bank share hit headlines in local media, my acquaintance showed enthusiasm despite not having even a faint idea about the basics of share business. But over a period of time, he learnt to read the pulse of share market and built his own investment portfolio as he added shares of some prominent companies to his ‘small but beautiful’ portfolio by subscribing through initial public offers (IPOs) of these companies.
My acquaintance adopted an investment strategy which was against the wind. When almost every local investor was entering into the stock market to make quick bucks, he decided to hold the shares on long term basis. During all these years he never gave a thought to off load even a small percentage of his stocks in his portfolio. He calls his ‘small but beautiful’ investment portfolio as a ‘goldmine’. For this he gives a simple reason. The reason is that he receives dividend regularly for his share holding. His holding has appreciated manifolds and even dividend income has surpassed his capital investment by many times.
He’s quick in calculating yield on his shares. For him JK Bank shares are a good example to quote healthy dividend income. For 100 JK Bank shares, which had purchased at Rs.3800 in 1998, he has earned a dividend of Rs.14190 so far and the market value of these shares has appreciated to above Rs.80000. So, I came across to the first local investor who is an investor in real sense and who weighs the merit of his investment in terms of dividends he receives.
There may be more the likes of him, but I have observed that majority of our local investors hardly think of dividend income. Even as they receive it, they take it valueless. Their greed to see their money multiplies rapidly and that too in less time has handed over only considerable loss to them.
From investors’ point of view, dividend conveys financial well-being of the company and it communicates a clear message about future prospects and performance of the company. In fact, dividends must be taken as a worthwhile yardstick to measure the prospects of a company. Typically, mature, profitable companies pay dividends. However, companies that do not pay dividends are not necessarily without profits.
As a rule, it is not obligatory for companies to pay dividends to shareholders. It is their free will that whether they want to share profits with shareholders or not. Not all companies pay dividends. Though it is not essential for companies to pay dividends, but it is important for them to keep shareholders interested in their shares.
An investor can use dividend payment as a measuring rod to estimate the financial well being of a company. If an investor finds that the company with a history of consistently rising dividend payments suddenly has cut its payments, he should treat this as a signal that trouble in the company is looming. In simpler terms, dividends can give investors a sense of what a company is really worth. As dividends are a form of cash flow to the investor, they are an important reflection of a company's value. The bottom line is that dividends matter. Profits shown in balance sheets speak one thing about a company's prospects, while as profits that produce cash in the form of dividends communicate entirely another thing.
Precisely, dividends offer investors another way to make money and this income is more predictable. So investors should not hesitate buying and holding of shares of the companies with a good history of paying dividends and it makes good sense to achieve financial goals. In succinct, for investors like my acquaintance, dividends are assured source of income and those who value dividend are called as ‘value investors’. Notably, high dividend paying companies stocks are more stable than other stocks. This means, best strategy for investors is to buy shares of quality companies that pay dividends regularly and without any cut.
Lastupdate on : Sun, 30 Oct 2011 21:30:00 Makkah time
Lastupdate on : Sun, 30 Oct 2011 18:30:00 GMT
Lastupdate on : Mon, 31 Oct 2011 00:00:00 IST
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