DIVIDEND IS THE WAY TO EARN?

about 11 months ago
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Hindustan Zinc made everybody sit up and take note.

More than its earnings for Q2FY21, it was the dividend. It declared an interim dividend of Rs.21.30/share (FV of Rs.2/share). This is a 1065% dividend!

And dividends have been raining ever since the earnings season started; its almost like companies want to reward the shareholders with something to hold on to. Well, at least the companies are giving this “stimulus” of dividend – something substantial unlike the stimulus from the Govt – you see it but you don’t feel it.

IT companies have been especially generous with TCS, Infosys, Mindtree, HCL Tech, L&T Tech, L&T Infotech, Mahindra Tech, Wipro – all of them declared interim dividends.

Even the FMCG companies – HUL, Nestle, Britannia, Colgate; Marico is also planning to declare an interim dividend on 28th Oct when it declares its results.

The result season has just started and is slowly picking up steam; as we go ahead we will see more companies declaring dividends.

The distribution of dividend is directly proportional to the profitability of the business, barring PSUs, which are under duress to fill the Govt’s coffers. So, when companies declare an interim dividend, it indicates two things – the outlook is good and they have cash to distribute.

What we also see is that the generosity of the dividend is directly proportional to the promoter holding – higher the stake, more is the frequency of the dividend and higher rates too.

Dividends are back in vogue ever since the FY21 Budget abolished the dividend distribution tax (DDT). The dividend income is now taxable at the hand of the shareholders at rates applicable to their income slabs. Prior to this, it was the companies who were being taxed for giving out dividends, now we pay.

In the previous fiscal, the highest dividend payers were TCS, followed by Hind Zinc and ITC.

So, what does one do? Make all investment decisions based only on dividend payout?  Maybe best to apply the dividend-based valuation - it’s the most apt tool to estimate investor’s return.

How does one calculate this return? Very simple. One can arrive at the return by dividing the expected dividend by the stock price and adding the dividend growth rate to it (expected dividend/stock price + dividend growth rate). And while doing this, it is imperative to remember that when the dividend is negligible, growth rate of the dividend is the determining factor for long-term return.

Does this mean that for a short term investor, dividend holds no relevance? When one looks at short term investment, naturally, capital appreciation is the highest priority. But dividend can become a decisive factor if the dividend yield is high. This dividend yield is arrived at by dividing the last annual dividend with the current price. But there is a stick to this carrot. Dividend yield is a great return only if the price remains at the same level and the company sticks to the same dividend rate. If the dividend rate remains the same but the price goes down then the return is naturally below the dividend yield. And if the price goes up, the return will be higher. Thus in the eventuality of a capital loss, investors cannot earn a return equal to the dividend yield.

Yes, dividend paying ability is an important criterion in deciding on investment but it cannot be the only one. An overall insight into the nature of the company’s business, balance sheet is imperative. The logic is simple – if business is faltering and profits are dipping, naturally dividends will also come down.

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