Do Dividend Paying Stocks Really Help Investors?

Date: 07-03-2017
Views: 1001

Investors clamour for stocks that pay dividends and rejoice on dividend announcements. Is that justified?

Edited transcripts

UDAYAN RAY What do you make out of dividend announcements. There are a lot of people who keep hunting for regular dividend paying stocks. What do they need to keep in mind? That’s coming up shortly.

Well who doesn’t mind a dividend announcement or a dividend coming along? And that is something a lot of investors look forward to. Now, when there is a dividend announcement, or there’s a company which is regularly paying dividends, how does this whole aspect of stock market investing, or share market investing some people would say, come in the whole big picture of an investor?

To help us figure that out, the camera will now focus mostly on Mohit Satyanand, our stock market expert, who has quite a few things to say about dividend yielding stocks.

Mohit!

MOHIT SATYANAND Dividends don’t matter. Okay? In fact, after the government introduced the Dividends Distribution Tax (DDT), I would say that a company which declares dividends is actually reducing your earnings potential. It’s very simple.

Whether a company pays dividend or doesn’t pay dividend, the earnings that it makes belongs to you, in the proportion that you earn from the shares of the company. Mathematically speaking, when the company earns money, that boosts the value of the share.

Now, you can take that value out in one of two ways. The first is to sell the share of the company. Given Indian tax laws, if you hold a share of the company, a publicly listed company for over one year, when you sell the share, you do not pay any tax. Because it is treated as a long term capital gain, long term capital gains in equities are exempt from tax.

On the other hand if a company decides to pay you some of that amount through dividend distribution, it first has to pay a dividend distribution tax. So it’s not taxed in your hands but it’s taxed in the company’s hands. The company belongs to you and therefore, the effect is the same as if you were getting taxed. And that is why mature shareholding economies like in the US, most successful companies don’t pay dividends.

I think there is only one signaling value to dividend which is that people feel reassured if the company is paying dividend because then they say that, oh! The company is actually making money. It is not manipulating its books. It has money to pay out by way of dividend. But if you need that kind of signal from a company, your level of trust in the company is so low, that the dividend makes you feel that ah okay, this is a decent company I can trust. You shouldn’t be owning its shares in the first place.

UDAYAN RAY Well that must be quite reassuring and it clears the fundamentals— investing fundamentals of investors. What Mohit is trying to say is that you should not be bothering about share prices or stock prices of companies which are announcing dividends or not announcing dividends. That is really, really should not be your area of focus. The area of focus is again…

MOHIT SATYANAND If I may Udayan, I would like to expand this discussion just a little bit, and ask you a question. Would you rather hold shares in a company where the earnings are static and where they pay you 10% dividend? Or owning shares in a company where the earnings are growing by 20% per annum and it doesn’t pay any dividend at all? For me the answer is absolutely crystal clear. I would much rather own shares in a company which is growing because eventually those earnings are going to accrue to me, whether in the form of dividends sometime in the future, or more importantly in terms of capital appreciation per share.

UDAYAN RAY Well there you go again, earnings is back in the picture. It seems that earnings along with how well a company utilises its capital are the two most critical pillars of stock market investing. Just in case you disagree with Mohit, what are you waiting for? Go right ahead and write in the comments section. Make it civil. Okay? And then of course if you are liking this series we would love to have you subscribe to it. And if you’ve liked this video, go ahead and click on the like button. And of course stay connected with us on all leading social media platforms.

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