Your opinion about dividend

Discussion in 'Ask A Query About Your Stock Picks And Portfolio' started by Guru Vachaal, Apr 19, 2015.

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Why Dividend is important for you?

Poll closed Apr 29, 2015.
  1. It is a tax free extra income

    0 vote(s)
    0.0%
  2. It is a proof that company is making real profits

    2 vote(s)
    18.2%
  3. Dividend tells that company is investor friendly

    0 vote(s)
    0.0%
  4. I don't prefer dividend paying companies because it limits growth

    1 vote(s)
    9.1%
  5. I don't care about dividends

    1 vote(s)
    9.1%
  6. Agree with option 1,2 and 3

    7 vote(s)
    63.6%
  1. Guru Vachaal

    Guru Vachaal Let's discuss the fundamentals..

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    Lets see what we think about dividends. :)
     
  2. bholu

    bholu Active Member

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    I think 2 and 3 are the most relevant points...first is also correct but income from dividend is not substantially large unless it is quite high which is rarely seen..
     
  3. Meenakshi Razdan

    Meenakshi Razdan Administrator Staff Member Moderator

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    I think there is a mis-conception that dividends are "tax free". It is not so because dividends attract a dividend distribution tax (DDT) at the rate of 19.994% on the amount actually distributed as dividend to the shareholders. This tax is paid by the company (and indirectly paid by us).

    So, it is preferable that the company reinvests the profits in the business because it will compound at a higher rate and lead to higher capital gains. If the company does not have a need to retain the profits, it can use it to buy-back the shares. This will increase the EPS, ROE etc and lead to better capital gains for investors.

    The absurdity sometimes is that companies pay generous dividends to shareholders even though they have high-cost debt. They can enhance shareholders’ value by retiring the debt and lowering interest expenditure.

    If you have need for a steady stream of income to meet your day-to-day expenses, it is better to sell a bit of the long-term capital asset and raise the funds rather than to rely on dividends.

    So, if all things are equal and the only point of distinction is a dividend paying company versus one that is reinvesting its profits in a high ROE business, I would prefer the latter.
     
  4. Parin Gala

    Parin Gala A long term investor

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    Dividend income is tax free. But usually the amount is too small to make a difference on our financial standing.

    Also, it is a proof that the company is making real profits and has real cash in its books.

    But it also results in waste of capital since the amount distributed is granular. 100 rupees here 200 rupees there. If it stays with the company as a big amount it can do something constructive out of it.

    I remember Microsoft never paid dividends for many many years and reinvested the earnings back into the business. It grew at a good rate then. But when it distributed dividend after some years many big investors were unhappy about it.
     
  5. Meenakshi Razdan

    Meenakshi Razdan Administrator Staff Member Moderator

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    This is a good point. The amount would be too meager for individual investors to be able to do anything constructive with it while the company would be able to use it productively.
     
  6. bholu

    bholu Active Member

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    Well dividends do improve investor sentiment...also in India where accounting standards are not as robust this is the only way to know for sure that company is generating surplus cash flows..last year oracle India gave Rs 500 as dividend, stock saw a re-rating
     
  7. Srouta Mukherjee

    Srouta Mukherjee Well-Known Member

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    Agreed. There is a good feeling in getting dividend warrant in hands. It improves investor sentiment about company.
     
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