Is this the best investment during lean times?

May 3, 2012

In this issue:
» PIMCO's Gross predicts another downgrade for US
» Foreign investors scared of investing in India
» The housing bubble that's twice as big as US in relative terms
» The classic face off between Ron Paul and Paul Krugman
» ...and more!

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To the naked eye, the difference between an investment returning say 15% per annum and the one returning 17% per annum may not look like much in the near term. But as the time horizon increases, the difference keeps getting bigger. For instance, after 10 years, the investment yielding 17% per annum will have accumulated nearly 20% more money than the one with 15%. And after 20 years, the difference would have gone up by as much as 40%.

Thus, when it comes to investing, even a couple of percentage points of extra returns matter. However, we routinely encounter cases where investors turn a blind eye to the same. Nowhere is this more evident than in the case of dividends we believe. Ask most investors and they will say that they invest in stocks only because of the capital appreciation potential of the same. Dividends are seldom the decision drivers. However, as the example just given shows, such investors are likely to end up paying a significant price for their dividend negligence over the long term.

This is not all. As a leading daily points out, dividend payouts are also likely to be an investor's best friends during lean times. In other words, when markets keep going up and down in a narrow range, it is the dividends that come to an investor's rescue. Take for example the period between March 2008 and 2012. During this time, the Sensex has returned a total of 17.9% out of which more than 1/3rd was accounted for by dividends. And for the BSE Mid cap index, the share of dividends in the total returns was as high as 134%. In fact, had it not been for the dividends here, the total returns would clearly have been in the negative territory.

Thus, as we have seen, dividends not only help propel investment returns over the long term, they also help generate sizeable returns during periods when the stock markets go through lean times. Little wonder, dividend paying stocks should be a must have in one's portfolio.

Do you think dividend paying stocks are a must in an investor's portfolio or one should look totally for capital appreciation? Share your views with us or post them on our Facebook page / Google+ page.

 Chart of the day
Today's chart of the day highlights how India's trade deficit has reached the highest ever level in FY12. While our imports have exceeded imports most of the time, the difference in FY12 has come as high as US$ 185 bn. Combine this with weak capital inflows and one gets an idea on why rupee seems to be under immense pressure. Unless petro prices cool off, we do not think a big respite is in the offing any time soon. Of course, imports of precious metals such as gold have also caused the problem to exacerbate a bit.

Source: Business Standard

Indian government's dillydallying and bordering on strange behavior has scared foreign investors. The government's proposals to tax all foreign merger and acquisition deals can lead to just one thing. No more merger and acquisition deals. This is basic common sense which even a layman can understand. But apparently the government doesn't. Its recent decision to tax Vodafone has created ripples in the international markets. This decision has come despite Vodafone getting a clear chit from the Supreme Court of the country. As a result, leading international companies have clearly stated that they are actually scared of investing.

Policy paralyses, greedy tax rules, are just some reasons that they have cited for being scared of investing in India. Even domestic companies have started to become exasperated with the government's inactions. High time the government woke up from their state of inertia and did something. Otherwise the much needed foreign and private sector funds would remain a dream.

Two Americans with opposing ideologies debate on some of the most pressing issues engulfing the US. One of them is Ron Paul, a Congressman. The other one is a famous economist and columnist by the name of Paul Krugman. The two are at absolute loggerheads when it comes to their beliefs about the economy and the role of the government. Paul Krugman believes that the government has an important role to play on the fiscal and monetary front. He opines that if the economy is not managed and stabilised, it is susceptible to tremendous risks and volatility.

Ron Paul vehemently rejects Mr Krugman's views. Mr Ron is a firm believer of the free market economy. As per him, governments should be smaller and their intervention in the economy should be very limited. The moment the Federal Reserve (US central bank) starts dictating interest rates, recklessly prints money as per its discretion, all essence of capitalism is lost.

History is proof that the Fed does not have a great track record. For instance, over the last century, the US dollar has lost about 98% of its value. Even during the recent financial crisis, the government salvaged big banks and big corporations. However, the government has done little to curb high unemployment levels. It has shown no intention to put checks on the widening income gaps.

We very much stand by the views of Mr Ron Paul. We believe that the government has certainly done more harm than good to the economy. By not allowing the economy to follow its natural course and correct on its own, the Fed is only making the eventual crisis worse.

Standard & Poor's recent downgrade of India may not have come as a surprise to some. The factors on which this downgrade was done were already known and were nothing new. But that does not mean that the government remains complacent. Indeed, there are inherent risks that the Indian economy faces which require the government to pull up its socks and get down to serious business. And these are not just the problems of twin deficit - current and fiscal deficit - but what is being called a quadruplet deficit problem. This includes governance deficit and liquidity deficit.

All the 4 taken in conjunction paint a worrying picture. The governance deficit has largely been a result of inaction by the government to push through some reforms and the spate of scandals that have rocked the country. Total debt has soared since the 1990s largely on account of an increase in private debt, while government debt has moderated. However, the latter has been due to high growth recorded by the Indian economy in all those years. Thus, if growth does not take off at the pace envisaged, high public debt too will come back to haunt the government. The priority for the government for now is to cut down fiscal deficit and focus on reforms. Is it listening?

When it comes to China, size matters! And no, we are not just referring to its burgeoning GDP (Gross Domestic Product). The economy has so far earned the tag of being the largest consumer of commodities. It is the largest exporter to the West. It has amongst the largest forex reserves. But it seems that when it comes to asset bubbles too, the Mandarins do not want to be left behind. At least that is what some statistics put forth by Hugh Hendry on the China property bubble suggests. Worth noting that CIO of Eclectica Asset Management is famous for his bearish views on China.

He believes that the real estate bubble in China has more to it than spiralling urbanization. It seems that Chinese households increased their mortgage borrowings 4 times between 2008 and 2010. By mid 2010, the Chinese central bank estimated that 18% of households in Beijing owned two or more properties. But many of these lay vacant. Not surprisingly, the ratio of household debt to income rose by 20% in these 3 years. Since then, the Chinese central bank has tightened lending towards properties. However, having spent twice as much as the US on a relative basis on the property bubble, China is yet to face the hard landing.

In 2011, the US lost its AAA rating for the first time in the history of the country. In a big move S&P rated the country AA last year, while Moody's and Fitch held on to their top notch ratings. But, if Bill Gross, founder of PIMCO, the world's largest bond fund is to be believed, history may just repeat itself. The world's largest economy is running a crippling structural deficit. Unless the government addresses its toxic liabilities, US is heading for another downgrade, according to Gross. Not only does the US have US$ 15 trillion in terms of current debt. But if Medicare, Medicaid and Social Security are also included, the liabilities are 3-4 times that. Quite a grave situation we think.

Meanwhile, indices in the Indian stock markets opened below the break even today with the BSE-Sensex trading lower by around 90 points at the time of writing. Heavyweights like ICICI Bank and Hero Moto Corp were seen adding maximum selling pressure. While Asian markets closed mixed today, Europe has opened on a positive note.

 Today's Investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

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5 Responses to "Is this the best investment during lean times?"

Ganapathy Sastri

May 6, 2012

Dividend yield theories miss one essential point: When you buy stocks / shares, you are buying FUTURE PROFITS which ALWAYS have to be ESTIMATED and predicting future is always error prone. You need to treat dividend received as a RETURN OF YOUR OWN MONEY and you will know the gain / loss only when the cycle is completed ie. when you sell the shares. Alternatively, you may mark your investment to market on a periodical basis to know the gain / loss after adjusting for dividend received.
An investor should may treat the entire EPS as his dividend and work out E/P% AND then take decisions on purchasing / holding / selling shares. The E/P% is the inverse of P/E ratio expressed as a %.

Like (1)


May 4, 2012

"Indian government's dillydallying and bordering on strange behavior has scared foreign investors."

Pranab Mukherjee and Co are being myopic as usual by trying to kill the goose that lays golden eggs thinking that they can get all the gold in one shot but not realizing that if they continue down this road with Vodafone, there will be no more geese and no more eggs.

Like (1)

R V Iyengar

May 4, 2012

The CMP of most companies is a multiple of the face value.
Say the price of a Rs. 10 share is rs 100 as of now. If the company were to pay a dividend of 100%, it works out to a mere 10 % returns effectively. If the CMP is not too high ,vis-a-vis the Face vale and the dividend is more than 100%, the dividend yield would become meaningful.
Dividend is good for those initial investors, who got shares at face value ( Infosys e.g.).
Finding such shares is difficult. Best bet is to invest in Dividend Yield MFs.

Like (1)


May 3, 2012

Of Course, Dividends are one of the most important returns to be looked at. Supposea Co. is giving consistent dividend of 20%,a and if your are both smart, as well as lucky, and if you buy a stock in qty. of 1000 shares. And if you are lucky if the stock gives even 50% plus appericiation in 3 yrs,AND if you sell 50% of your stocks after it has doubled, for the balance 50%, you will ahve the capital appericiation in your books, as well as you will get dividend for the shares whose value invt. as far as you are concerned is almost zero. And remember this mrkt gives you an oppurtunity every moment. Thus ALWAYS be aware of the dividend yield, before investing.
Thanks Damani

Like (1)

g r chari

May 3, 2012

If one is investing for long term, it makes sense to invest in a company which is generating positive cash surplus and rewards the shareholders in the form of dividend. The price of a share is more a function of broader economic parameters like inflation, growth prospects, return/yield expectations etc. A regular dividend paying company with a healthy financial track-record automatically gets re-rated by the market.

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