Would you like your Stocks to become Fixed Deposits? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Would you like your Stocks to become Fixed Deposits? 

A  A  A
In this issue:
» Foreign investors turn net sellers in May...
» Geithner: US' performance in many ways is the envy of many countries
» A round up on markets...
» and more....


00:00
The past few months have been good. Even as a retail investor, you would have made money in stocks. And even the relatively safe bets on stocks or large bluechip companies have offered healthy returns. But the confidence to make money in stocks was absolutely absent until February 2014. I remember my friends and family telling me that they would any day prefer putting money in FDs and post office saving schemes rather than in stocks.

And despite explaining the basic concept of inflation eating into their real gains, they were still okay with the 8% to 9% pre-tax returns on their 'safe' investments.

"Share bazaar mein bahut jhol hota hai", "Stocks ka bharosa nahi" or for that matter "I don't understand the stock markets" were the usual responses that I used to get back then.

That the same people are now interested in putting money in stocks is another matter altogether; in fact this is a topic that was covered a while back. The key takeaway is that the best returns that investors can earn is by buying into stocks when the outlook or sentiments are dull. In other words, when the valuations are attractive. This approach been proven numerous times in the past and is something that will continue in the future as well.

In any case, with markets being the way they are now, one approach that is likely to gain importance is that of 'dividend investing'.

Why?

Well... simply because stocks with strong expected dividend payouts, good yields and good growth prospects tend to provide a good amount of downside protection. And this is something that investors would be looking out for when sentiments turn jittery. After all, dividends are real and difficult to manipulate as they are directly paid to shareholders. Thus, if the firm announces a certain dividend payout, it ought to be real!

The ultimate aim essentially would be to curb the downside - an important approach to outperforming the market over long periods.

Now... wouldn't it be interesting to try and combine both the approaches discussed above? Good, safe returns in stocks, coupled with protection on the downside.

Take a look at the table below to get a better understanding of this...

Dividend yields and growth rates required to turn Stocks to FDs
  Yield 5-yrs down the line Yield 10-yrs down the line
Current yield/growth 5% 10% 15% 20% 25% 30% 5% 10% 15% 20% 25% 30%
1.0% 1.3% 1.6% 2.0% 2.5% 3.1% 3.7% 1.6% 2.6% 4.0% 6.2% 9.3% 13.8%
2.0% 2.6% 3.2% 4.0% 5.0% 6.1% 7.4% 3.3% 5.2% 8.1% 12.4% 18.6% 27.6%
3.0% 3.8% 4.8% 6.0% 7.5% 9.2% 11.1% 4.9% 7.8% 12.1% 18.6% 27.9% 41.4%
4.0% 5.1% 6.4% 8.0% 10.0% 12.2% 14.9% 6.5% 10.4% 16.2% 24.8% 37.3% 55.1%
5.0% 6.4% 8.1% 10.1% 12.4% 15.3% 18.6% 8.1% 13.0% 20.2% 31.0% 46.6% 68.9%
Data Source: Equitymaster

The table above, I believe is quite a powerful one.

It shows the current yields on the left column and the growth in the same (in the rows). And the corresponding cells show the yields the stock would provide five and ten years down the line. The highlighted cells are those which provide returns higher than the yield on the 10-year government security (which hovers at about 8% currently).

What it boils down to is to be able to buy and sit tight over longer periods for this approach to work.

Sure, one may argue that dividends essentially become a factor of growth in earnings and the capital requirements of companies. As such, consistency in dividend as well as company prospects should be considered while picking stocks using this approach. In other words, dividends should not be the sole criterion for investments.

Do you agree that the approach of dividend investing is one that can help curb the downside? Is this an approach you have taken in the past? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
High Potential Small Caps You Probably Never Knew About...

Have you heard of companies like eClerx, Page Industries or even Elgi Equipments Ltd?

Maybe you know about them now. But our subscribers found out about them a long time back.

Yes! And as a result, also made returns like 247% in 5 months, 1,811% in 5 years and 250% in 2 years 1 month from them.

These are the kinds of high potential small caps you have been missing out on till today.

Of course, we both know that small cap investments carry a certain degree of risk. But in our 7 plus years of recommending small caps, we have succeeded in scoring more winners than losers thanks to our exhaustive research process.

Want to know about such high potential small caps on a regular basis?

Click herefor full details...

------------------------------

02:05  Chart of the day
After investing heavily in Indian equities for most of 2014 and the first four months of 2015, FIIs turned net sellers in the month of May 2015. The reasons for this are many. The Indian economy has not recovered at the pace envisaged. And this has been reflected in the earnings performance of India Inc. Oil prices are rising again. The US Fed is expected to raise rates this year. And the implementation of reforms has been slow.

Is the Modi effect fading out?
* Till May 7, 2015

The outflows also explain the fall in the indices in the last one month since FII movements play a role in influencing the movement in the Indian stock markets. So if not India, where are the FIIs deploying this cash? China is one market that foreign institutional investors (FIIs) seem to be interested in. But are the valuations in that country cheap? Does not really seem so. Indeed, if you compare the valuations for both countries, then China is trading at a higher premium to its 10 year average forward P/E. So whether these investments in China are for a longer tenure remains to be seen.

03:10
Now if you ask Former Treasury Secretary, Tim Geithner, whether there is reason to be worried about the buoyancy in the US stock markets, he will tell you that 'The US is not turning Greece'! According to him, in 2008 everyone thought that the US was going to have a Great Depression. People thought it could have hyperinflation. Or it could turn into Greece. But thanks to the resilience of the economy none of that happened. And hence, Geithner is of the view that compared to the other major economies around the world today, the US is doing better. In fact he thinks that the US' performance in many ways is the envy of many countries. Well, we are no experts in predicting the short term performance of the US economy or stock markets. But one thing that we can say for sure that is the US Fed's ability to print trillions of dollars that makes the economy different from Greece. Else with its humungous debt burden, which the US government is unlikely to be able to service ever, the economy is hardly different from Greece. And therefore it is only a matter of time before yet another crisis hits the US.

03:55
It was a mixed week for global stock markets. The major Asian stock markets ended the week in the red with stock markets in China (down 5.3%) and Hong Kong (down 2.0%) leading the losses. For China, it was the biggest weekly loss in five years, mainly due to concerns over further government measures curbing speculation and the possibility that new stock listings may drain funds from existing equities. Morgan Stanley also downgraded MSCI China index to equal weight from overweight. This was the first downgrade in seven and a half years for the index. Stock markets in Hong Kong took the cues and declined by 2% over the week.

The US stock markets closed the week in the green (up 0.9%) cheering a jobs report that most believe could warrant tightening by central bank very soon. The job report for April showed a creation of 223,000 jobs and an unemployment rate of 5.4%.

The major European stock markets witnessed gains during the week, supported by a more decisive-than expected UK election outcome and US jobs report. In the UK general election, the conservative party came to power. The UK stock markets were up by around 1.4% for the week. The stock markets in Germany and France gained 2.4% and 1.0% respectively over the week.

Performance during the week ended May 08, 2015
Data source: Yahoo Finance

The Indian markets witnessed sell off in the initial part of the week as foreign investors have been selling equities on concerns of tax demands on capital gains made during previous years. However, the markets rebounded sharply on Friday, with BSE-Sensex registering highest one day gain in four months. The rebound is being attributed to short covering and improvement in the sentiments due to the announcement by the Finance Minister Arun Jaitley to form a panel for resolving the Minimum Alternate Tax dispute. Sectorwise, FMCG and IT stocks led the gains while stocks in the banking and consumer durables sector were the key losers. The small cap and mid cap indices lost 1.1% and 1.7% respectively for the week.

04:50  Weekend investing mantra
"Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies." - Benjamin Graham
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat.

Equitymaster requests your view! Post a comment on "Would you like your Stocks to become Fixed Deposits?". Click here!

1 Responses to "Would you like your Stocks to become Fixed Deposits?"

vikram

May 10, 2015

Good work by the researchers at EM.
Totally agree that healthy dividend payouts downsides the investment risk.
I request the EM team to come out with a list of companies giving handsome dividends consistently
Thank you

Like (1)
  
Equitymaster requests your view! Post a comment on "Would you like your Stocks to become Fixed Deposits?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407