Are dividend stock investors foolish? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Are dividend stock investors foolish? 

A  A  A
In this issue:
» Why don't central banks buy the stock markets outright?
» China's growth dangerous for human race, feels Krugman
» US Fed unveils more stimulus
» Who's behind Noida's current manufacturing plight?
» ....and more!


--------------------- You have nothing to lose... except this opportunity! (Offer ends tonight) ---------------------

Try one of our most-popular stock recommendation services at just Rs 499.

Get instant access to 2 Special Reports with full information on 6 high-potential Small Cap stocks and much more...

Click here for full details... and act now!

This special offer ends at 11:59 PM tonight.

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


00:00
 
Investing based on dividends is no doubt a good and powerful idea. This is because unlike most other financial parameters, this is the one that is most immune to manipulation. But like all good ideas, this too has been taken to the extreme we believe. So enamoured have investors become with dividends that at times they tend to overlook other factors. We feel the most dangerous of these is the reluctance to check out the actual source of the dividend of the company under consideration.

When asked why they have a certain stock in the portfolio, the investors cite its track record of high dividend payouts. But since it is a part of basket approach of picking stocks, they don't really bother to check out the details. And this is where the biggest errors occur.

You see, companies don't operate in isolation. Their business environment is subject to frequent changes. And thus, it is quite possible that the high return on capital that they enjoyed in the past has come down dramatically. In fact, this is the rule rather than the exception in the business world. But most such companies would still continue with their high dividend payouts. Because if they don't, the stock price of their firms could see a huge correction.

Thus, it is very important that an investor checks out the source of dividends of each and every firm that he has invested in. Because while you are looking at the return on your money, there's every chance that the dividend is actually the return of your money. Companies that don't quite earn the cost of their capital and still pay dividends are perhaps paying out the dividends from their capital. And sooner or later, they will run out of capital. Hence, dividend investing is no doubt a great thing. But do make sure that it is authentic enough. Otherwise, you would be made to look like a fool.

What are the factors that you take into account when investing in a dividend stock? Share your views or you can also comment on our Facebook page / Google+ page

01:06  Chart of the day
 
Economies of India and China may not exactly have the voice in matters of international trade in proportion to their economic size. But we believe that this could soon change. For their economic clout is only going to get bigger. Today's chart of the day highlights how these two nations have seen their share of global GDP go up in the last decade or so. While China now accounts for around 10% of global GDP as opposed to just 4% a decade back, India's contribution too has increased to 2.6% from 1.5% earlier. Meanwhile developed nations like US and Japan have seen their influence erode. What more, the trend is only likely to improve in favour of the Asian giants going forward.

Data source: Adventuresincapitalism.com

01:40
 
Should central banks buy stocks? Although it may sound ridiculous, the idea has indeed been put forth by a Citibank global strategist. Business Insider has published the interview of Citi analyst Robert Buckland. The gentleman is clearly not in favour of the low interest rate policy adopted by the US Fed. On the contrary he believes that low interest rates are increasingly part of the problem rather than the solution.

He also thinks that central banks' low interest rate policy is encouraging the wrong kind of corporate behaviour. Companies are using low interest rates to borrow money for share buyback. This makes companies capital distributors rather than investors! Instead they should be investing in additional capacities. The low investment in turn is hurting job creation. To discourage this behaviour, Buckland suggests that central banks should intervene in stock markets. This would stoke valuations and discourage share buybacks.

We could think of no other term to describe this suggestion than ludicrous. The gentleman is critical of the Fed's interventionist policies and then goes ahead and suggests an intervention himself. In our view, the Fed should just leave the markets alone and do away with intervention of even the remotest kind.

02:17
 
A major problem facing the world today is the growing dichotomy and conflict between the man-made world and the natural world. While industrialisation and information technology may have brought us several material comforts, this has not come free. Increasing concerns about climate change and environment are the price the world has to pay for all the economic excesses.

Economists have now started acknowledging this. Paul Krugman is one of them. Krugman says that the phenomenal growth in the Chinese economy may have been a great economic success. But this success is going to have far-reaching consequences for the globe. China has already emerged as the largest polluter in the world. Most of its power plants are coal based. Moreover, given its huge appetite for consumption, the dragon economy is also putting pressure on finite natural resources such as minerals, oil, etc. The worrying aspect is that China is not obligated to cut greenhouse gas emissions under the Kyoto Protocol. The reason for this is that when the treaty was being drafted in the 1990s, China was still a developing country.

Adverse changes in climate and environment are a major threat that will have significant ramifications for the global economy. Investors must take into consideration these risk factors before making their investment decisions.

02:57
 
Indian manufacturers are gradually learning a painful lesson as to why China is considered the manufacturing powerhouse of the world. Indeed, one has to look no further than Noida as an example. Manufacturers in Noida, especially those in electronics, are facing the possibility of an imminent shutdown. This is as cheap Chinese imports find their way into the market. So far Noida has prided itself of having one of the largest concentration of SMEs is the country. But this Chinese threat means that it is now seeing a proliferation of traders. For starters, there is a marginal gap between the duty imposed for components and finished products. As a result, there has been an increasing preference for importing finished products and selling them in the Indian market, thereby boosting the fortunes of traders. Is Noida the only region facing the threat of Chinese imports? Or are there such pockets elsewhere in the country? One is not sure. But it has been apparent in the past that while India made significant strides in the services sector, there was and will be considerable ground to gain before it earned the repute of the kind China enjoys in manufacturing.

03:36
 
How do you bring an economy from the brink of disaster back to life? Central banks across the world are trying various measures in order to revive their economies post the financial crisis and the subsequent recession. The US Federal Reserve has now announced its own unorthodox measure to help revive the economy. Fed Chairman, Ben Bernanke announced that interest rates would be kept at near zero levels until unemployment falls to at least 6.5%.

The Fed expects rates to hold steady until unemployment figures improve. This is as long as inflation doesn't break the 2.5% barrier. The central bank also replaced an expiring stimulus programme with a fresh round of Treasury purchases. While earlier goals were more timeline driven, these action oriented goals will make monetary policy more transparent and predictable to the public. But, despite all these efforts, GDP growth in the US remains lukewarm. The upcoming fiscal cliff is also a matter of concern. Well, we just hope that new job creation will provide some respite to this ravaged economy.

04:08
 
The world's largest mutual fund, PIMCO, is not very optimistic on the global economy. It expects global economic growth to slow down to the range of 1.3% to 1.8% in 2013. This is lower than the current rate of 2%. The forecast of a slowdown is based on the poor performance of the private sector. As per PIMCO, the private sector is still showing signs of lower profits combined with lower rate of investments. This would lead the global economy's growth to stall next year.

PIMCO further expects the growth in US to drop to 1.25-1.75% from the current levels of 2.2%. This is on account of fiscal tightening which policy makers need to bring about to ward off the impending doom of a fiscal cliff. At the same time the latest round of quantitative easing has not really done its job either. It has been quite ineffective in boosting the growth the way the policymakers had envisaged it. Europe too has its own troubles to deal with. The Asian economies of China and Japan are victims of a slowdown too. All in all not a very bright picture for 2013 as far as the global economy is concerned.

04:45
 
Meanwhile, indices in the Indian stock markets are showing the same lacklustre signs today that they have shown all this week. At the time of writing, BSE Sensex was trading lower by around 20 points. FMCG and consumer durables stocks are seen facing the maximum pressure. While Asian stocks closed mixed today, European indices are trading with a positive bias.

04:56  Today's Investing Mantra
"Investing without research is like playing stud poker and never looking at the cards." - Peter Lynch
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
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.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?

Equitymaster requests your view! Post a comment on "Are dividend stock investors foolish?". Click here!

3 Responses to "Are dividend stock investors foolish?"

Umesh Sharma

Dec 14, 2012

Healthy dividend payout is not only a sign of business prosperity but also indicates the honest intentions of the management to reward its shareholders handsomely.Some Indian companies are notorious for denying their shareholders a fair return on their investment while they enjoy high salaries and perks.Needless to say they rot in the share market as no one wants them.Having said that it may so happen that the business conditions may be affected adversely In such a case the management should explain to share holders the fact.In any case as they build-up reserves in good time it should not be difficult to pay dividend from reserves when occasionally the profits are not adequate.One should not be afraid of lower market worth when the conditions are not good.The management which believes in the intrinsic strengths of the company can always utilize such opportunities to buy back its share and keep the bears away.Even discerning investors welcome such opportunities for bargain hunting.However paying dividends out of capital is certainly not advisable as it sounds death knell for the company.

Like 

B S MURTHY

Dec 13, 2012

Along with dividends, we have to see Book Value, Turnover growth, PE ratio,and any special news about the company regarding future plans etc. It is always safe to identify dark horses and invest in them before they become more popular.

Like 

Abhay Dixit

Dec 13, 2012


The Chinese threat is more important to Indian industry and investors than "Are dividends-----?". There has been very little reporting on this issue both by companies and government. Indian Govts, over the years, are generally not willing to stand up to foreign governments--- strong or weak( be it China, US, Bangaladesh or Pakistan)-- to protect our interests.

Like 
  
Equitymaster requests your view! Post a comment on "Are dividend stock investors foolish?". 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