What If It Rains Dividends in March? Here Come the Dividend Multibaggers... - The 5 Minute WrapUp by Equitymaster
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What If It Rains Dividends in March? Here Come the Dividend Multibaggers...

Mar 4, 2016
In this issue:
» Tariff hike on cards for discoms?
» Lessons for 'Make in India' campaign from China's mammoth restructuring
» ....and more!
0.00
Tanushree Banerjee, Co-Head of Research

We can only eat so much. And our refrigerators can only hold so much. Yet sometimes, we over-shop for fruits and vegetables. The vendor's offer to sell big quantities for less is tempting. But the pride of striking a good deal can make us buy quantities we are likely to waste.

All those unused credit cards stem from this same tendency. And when your broker asks you to buy a host of stocks set to dole out dividends, it is the same tendency at work.

Don't get me wrong. Dividends are good. Investors don't need to sell the stock to fetch an income. Dividends are often - if not always - an indication of healthy cash flows of the company. They help companies reward shareholders at critical milestones. Companies with limited investment needs can pay out surplus cash by way of dividends. A high dividend payout ratio indicates the management is willing to share profits with minority shareholders. Indeed, a high dividend yield makes a stock very attractive, and buying dividend stocks a great idea.

In their unique way, dividends from fast-growing companies can even become multibaggers. The compounding of dividends over several years can fetch you several times your invested capital. And when fixed bank deposit returns pale against inflation, dividend stocks can be a great hedge.

But should you be buying stocks just to cash in on the dividend? Should you be looking for companies paying milestone dividends? Should you be buying and holding stocks for the six months between March and August (when most companies in India announce their annual dividends)?

These are good questions to ask. Especially this March, at least, we expect a lot of companies to pay out dividends. Yes! It could rain dividends this March!

That's because the latest budget increased the tax levied on companies that pay out dividends, effective April 2016. Within two days of the announcement, about 70 companies decided to pay dividends right away. And with many others are expected to follow suit, you can expect your broker to encourage you to buy stocks this month to pocket the dividends.

But these dividend payouts, though significant, could be dangerous. They could prove to be bait to lure investors to arbitrarily over-buy stocks. Dividend income - unless consistent and from a fundamentally strong company - hardly compensates for the risk of investing in stocks.

Rather than arbitrarily investing in dividend stocks, what you want to do is to buy the most solid, consistent, and fastest-growing dividend companies - dividend multibaggers, in other words.

But what exactly are dividend multibaggers? How do you find them? And what price should you pay for them?

I have laid out just the details you need in my special report - How to Pocket 10-30% Returns Without Selling Your Stock. Click here to join in and benefit from great dividend stocks right away...

Don't give in to greed and buy junk companies paying early dividends just to save taxes. Not only will a bulk of their cash flow go to the promoters rather than the minority shareholders, but...like the excess fruit and veg in your refrigerator...most of these stocks will just end up rotting in your portfolio.

Do you buy stocks purely with the intent of pocketing the dividends in 3-6 months? Let us know your comments or post them on Equitymaster Club

2.50 Chart of the day

The poor financial health of the State Electricity Board (SEBs) is a looming concern for the power sector. Among the various things, these entities continue to reel under losses for years now. And the SEB's losses have rendered them incapable of buying more power from power producers.

Tariff hike must for Discoms health

The biggest reasons for these losses are low tariffs and poor realizations. In fact, most of these companies' operational losses are being funded by debt.

Owing to government mandate the SEBs collect lower tariff from the consumers. In fact, in some cases tariffs are even lower than their actual input costs. Despite the rising input costs, the SEBs are unable to increase tariffs due to it being a politically sensitive issue. Currently, power tariffs are nowhere close to where they should be. According to an article on Business Standard, the SEBs are looking forward to increase consumer tariff to compensate rising costs.

Government had recently announced scheme to support power companies, for the financial turnaround and revival of Power Distribution companies (DISCOMs). Besides this financial support, if government announces tariff hikes, this will help revive the power companies. The proposed coal cess makes the necessity of a tariff hike in power sector all the more urgent. Without it even the best of the power companies are unlikely to yield commensurate returns for investors.

3.50

China's annual legislative session, will begin on Saturday in Beijing. The Chinese leaders are looking forward to take some pre-emptive steps to protect the economy from further collapse.

The big challenge for the Dragon nation is to tackle its industrial overcapacity. While overcapacities are not new in China, but in various sectors the overproduction has surpassed threshold limits. These overcapacities threaten the Chinese economy as they have led to empty factories and companies overloaded with debt!

An article in Wall Street Journal highlights that the Chinese leaders have outlined plan to cut around 150 million tonnes of unutilised production capacity by 2020. Further it will also cut down the head count of approximately 1.8 m steel and coal workers. The government will spend approx. US$ 15 Bn towards this restructuring exercise.

However, such a production clampdown will be fraught with economic and social risks. One, absorbing the mammoth excess capacity is not going to be an easy task. Two, laying off millions of Chinese workers is going to be challenging. China has traditionally looked down on worker protests. With the deteriorating of economic conditions, the worker protests have intensified. Thus China's manufacturing sector will go through a lot of pain in the coming months.

As India tries to make a success out of its own 'Make In India' plan, there are several learnings to take.

4.45

After opening on a flattish note, he Indian Markets witnessed choppy trades and are presently trading near the dotted line. At the time of writing BSE Sensex was trading higher by about 22 points. BSE Mid Cap index is trading higher by 1% while the BSE Small Cap index is trading up by 0.8%. Sectoral indices are trading mixed with stocks from the metal and psu sectors leading the gainers.

4.50 Investing mantra

"Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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Equitymaster requests your view! Post a comment on "What If It Rains Dividends in March? Here Come the Dividend Multibaggers...". Click here!

3 Responses to "What If It Rains Dividends in March? Here Come the Dividend Multibaggers..."

HSCHIDAMBARA

Mar 5, 2016

Information regarding equity cash.

Like 

BISWAJIT KOLA

Mar 5, 2016

I AGREI

Like 

drumesh

Mar 4, 2016

i am a stock select subscriber so should i not get the list of dividend paying companies also..

Like (1)
  
Equitymaster requests your view! Post a comment on "What If It Rains Dividends in March? Here Come the Dividend Multibaggers...". Click here!
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