Your opinion about dividend

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.

 

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.