DIVIDEND YIELD

Any Investment must produce cash flow (returns). If we are owning either a Land or House we may be able to get money in the form of Renting or through Lease. Similarly in Stock investing it is termed as (Gains from stocks) Dividend. If we are being a long term investor the only term obtained as cash flow is Dividend.

                  

For each stock there is a Base value called Face value. In our country based in the face value dividend is announced. For example 10 rupees face value stock named “ Indian Bank ” up to the year ending March – 2011, has given 25% and 40% dividend , adding to a total of 65% (Rs. 6.50 /- )

                  

This dividend percentage is based on face value and announced. But, with the present stock price (or) with the price you have purchased , the gains obtained would be correct. It is called Dividend Yield. Let us again take Indian Bank.   

                  

This stocks present price  when taken as Rs.234 /- the March – 2010, Dividend yield is 2.78 % (6.50/234). Indian Bank which offered the public issue in 2007, if purchased then , the dividend yield may be (6.50/91) is 7.14 %. Among the various factors , the very important factor to be seen is dividend yield, while purchasing.

Generally the dividend yield being more is better. Sometimes, due to some problems in Organization the stock prices may have slashed. During these times the dividend yield seems to be large. The investors must be cautious while purchasing those stocks.   

                                               

The Indian Economy and the Organizations being in a Growth Track , the dividend yield is generally found low. The reason is the companies reinvest their profits in their Business itself. Our Nifty Index dividend yield is 1.07 % only. Banking like some sectors dividend yield may be somewhat greater.             

Generally, Middle and Small Cap Organizations dividend yield may be larger, when compared with Large Cap Organizations. Low risk taking persons can invest in dividend yield largely found stocks. Generally Old Economic Companies (other than New Economic companies ) dividend yield will be present more.    

Highest Price / Lowest Price :- 

Generally while analyzing various factors for purchasing a stock, the highest price/ lowest price and 52 weeks high / low can also be seen. This may indicate whether the stock is in Bullish phase or Bearish phase.

Stocks while costing nearest to Highest price, avoiding to purchase stocks is better. At the same time, either the lowest prices or the stock being in Bearish phase, we can buy a smaller Quantity.  

                  

Like the Sathyam Computers ( Present Mahindra Sathyam ) any large untoward incidents may happen. During those moments we must be cautious.

While the Entire stock market , being dragged (or) some stocks being dragged , the stocks may be available in very cheapest prices. During these periods , the other factors if found advantageous , we can utilize those golden moments definitely.      

Share Holding :-

The Stocks you ought to buy, before purchasing we can look a glance of the stock holding persons whom are belonging as partners. Efficiently managed Mutual Fund schemes, Government allied and private sector largest Organizations, Insurance Companies, I.F.C.( International Finance Corporation ) similar concerns being as Shareholders can be considered as positive points. It can be taken as a Filter.

Those people may have not purchased without Analyzing those stocks. F.I.I’s           ( Foreign Institutional Investors) being the investors, in one angle is considered better. The stock prices may rise.

On another side, Disadvantage is if money required for them in their country at any moment they may withdraw the amount invested from Indian stock market, which results in rapid downfall of the stock prices.

So, we must be cautious in that point. While compared with Large Organizations it may not be a problem. But for Mid Cap and Small Cap , the Downfall to be relieved may take a Larger period.        

Total Debts :- 

Several Organizations, thrown to the corner the reason is excessive presence of Debts. Debts can be termed as two faced coins. If the moment (period) is good it may lift a company to a greater level.

If it is in a struggle ( opposite ) it may push the company to the utter bottom of the valley. Similarly in India and in Foreign countries several Organizations were pushed to the bottom of the valley.

Without debts functioning a company is very much better. In some times the Debts being low , the Management may speed up their activities. The performance may be speedy in the Organization. After all the income from stocks may be considerably High.

The stocks you ought to buy , before purchasing, listen to the Total Debts of the Company. With regard to the Share Investment, listen to the ratio of the Debts received. For each sector it may differ.

Banking Organizations cannot function without Debts. Likewise the Organizations in service sector need not require debts largely. The stock you ought to buy,compare with the sector based best stocks. Doing those Analysis we can get a clear picture of Clarification about investing.    

Dividend Yield :-

Question: What is Dividend Yield and How is Dividend Yield Calculated

Answer: Dividend yield is an easy way to compare the relative attractiveness of     various dividend-paying stocks. It tells an investor the yield he / she can expect by purchasing a stock. This allows a basis of comparison between other investments such as bonds, certificates of deposit, etc.

To calculate the dividend yield, divide the annual dividend by the current stock price.

An Example: If company XYZ was trading for $10 per share and paid a $1 dividend, how much will the stock yield each year for the investor? Using our formula (Annual Dividend ÷ Current Stock Price = Dividend Yield), we find the answer is 10%.

The Dividend Yield 

Many investors like to watch the dividend yield, which is calculated as the annual dividend income per share divided by the current share price. The dividend yield measures the amount of income received in proportion to the share price.

If a company has a low dividend yield compared to other companies in its sector, it can mean two things:

(1) the share price is high because the market reckons the company has impressive prospects and isn't overly worried about the company's dividend payments, or

(2) the company is in trouble and cannot afford to pay reasonable dividends. At the same time, however, a high dividend yield can signal a sick company with a depressed share price. 

Dividend yield is of little importance for growth companies because, as we discussed above, retained earnings will be reinvested in expansion opportunities, giving shareholders profits in the form of capital gains (think Microsoft). 

Our Indian Companies are giving dividend based to the Face value. On seeing this either a company giving more or less dividend cannot be decided. If a company giving more dividend can be known from its dividend yield. The amount given as dividend is the percentage of present stock price, called as Dividend yield. 

          Yield = ( Dividend / Stock price ) x 100 

                   =  ( 10 / 1000 ) x 100

                   =     1 %  

Also we could have heard of 50 %, 195 %, 500 %, dividend giving companies. We need not be confused with those percentage. Except mentioning as dividend yield, if simply said in percentage is only meant as percentage to the Face value.  

For Example :-

                   Present stock price               Face value          Dividend

                                 100                                  10                      50 %

                   Dividend = ( 10 / 100 x 50 ) 

                                   = Rs.5 /-         

Past years dividend value can be utilized for present year dividend calculation also. But previously given dividend can now also be obtained is not guaranteed. Moreover we cannot expect the same also.

During Economic Crisis some large companies also never offered Dividend. Once in a year dividend must be given is not mandatory. Also yearly once is, not restricted.

In practice, many organizations are providing dividends more than once in a year. Interim dividends are also given. Continuous years to be given is not essential. The total number of dividends given, must be calculated for dividend yield for a certain year.  

                            

In dividend yield, highly earning companies growth may be slow. Since being already grown sectors , the P.E ratio may be low. Pay-out returns will be more due to the offer of dividend for the past years. Dividend yield scale can be a Better Shield for a Defensive Investor.

Management not swallowing the promoters money and distributing to all the share holders is an identity of Highest yield. At the same time it is also felt as the companies Balance Sheet being thick.  

Let us see 2 Companies, 

                                           ABC                       DEF   

          Stock price               50                         100    

          Dividend                 2 rupees                2 rupees 

          Dividend Yield =  ( 2 / 50 x 100 )       ( 2 / 100 x 100 ) 

                                   =           4 %                      2 %    

From the above example which company can be selected ? It’s a confusion in all the minds. Considering all the features as the same for both the companies ABC can be selected. Isn’t it ! 

                          

An Organization with its business transactions creating gains can be handled in 2 ways, 

1. Excessive gain can be Re-invested and Expanded.

2. Dividend can be given. 

3. Another type is the profit amount can be utilized for buy back of own stocks.

So that the number of stocks can be reduced. Moreover the share holders rights can be increased. 

                   

If the profits are not distributed to the share holders, and again Re-Invested for companies growth then the investment needs rapid growth. Shortly saying if the growth seems to be dull, then simply giving the Dividend to the Investors would be beauty to the Administration.

                                                         

Market Capitalization more than a limit grown up companies, the growth while they were smaller cannot be expected continuously. It means that Re-Investment need not be required continuously. After some period the profits must be returned to the Investors in the form of Dividend. 

                                                         

The best fact in dividend is cheating can’t be done. Only 2 facts,

1. Dividend will be given (or)

2. Dividend will not be given.        

Year- by – year the increase in dividend can be seen visibly. But in gains not like that. In the accounts statements and the Balance sheets portraying untrue EPS, due to Fraudulent actions with the help of Government Law and Auditors, can’t be committed in Dividend. Increasing the value of Dividend gradually indicates the identification of continuous Economic success.

                                                                            

Growth Organizations probably provide higher dividend. In the name of dividend sharing with the share holders is considered as a secondary part other than strengthening themselves. These types of actions must be felt prudent for both Administration and the Investor. Fair growth stocks after monitoring some years later ,apart from the price, the dividend rate will be increased considerably.

                                                           

Again analyzing in a certain angle, the dividend certifies the Managements stability and Decision capacity can be said. Without sharing the investors and the Company itself holding, may lead to Lavish spendthrift in the form of salary hike ,special benefits by the Top Officials of the company.

Instead if maintaining a stable policy of, the percentage of gain, the percentage of dividend, it testifies the managements honesty and Discipline. If failing the above , leads to distress, and the stock prices can get down.

                                                                                               

A stock in very low P.E  ratio with 3 – 4 % dividend ratio yield, chances to grow more than beating Inflation, if found by a value investor. Holding these stocks for several years will definitely produce better results than growth stocks. Moreover the acquired dividend can again be re-invested ( Dividend re-investment ) and enjoy the activity. Stocks like these criteria need not be a rapid growing stock instead need not be a vanishing stock must be noted in mind. 

                                               

Like Philip Fischer, a successful growth investor, rejects the dividend as a secondary Why ? Because new concepts , Plans , Technology, incorporates new companies may require largest capital requirement. During that time we can’t expect dividend from them. If expecting, investors in Future , may loss huge percentage of Organizations growth which may reflect in stock prices.

                                                                                               

Capital appreciation alone expecting investors may not give more importance to dividend. From his 40 year investment strategy , if considering dividend alone as an important fact , he would have lost several Huge profit investments, at a silly reason must be bared in mind. 

According to the statement by the finance ministry, the Tax Exemption for dividend even if it is a huge value, may be a relief for small investors. This statement reveals that the largest stock holder persons like promoters, and Directors may take advantage of Dividend. Even for small investors and for overall stock investors this can also be a suitable news.  

                                                                      

Most commonly other than Large, moderate and small companies are yielding and offering fair dividend yield. Very rare large companies are found in this List , investors must carefully access and select for investment , buying intermittently during the stock prices being low.

On today’s position the following features can be considered for selecting the stocks:- 

1. Stocks traded in national Stock Exchange.

2. Market capitalization being more than 500 crores.

3. Being in the industry for many years.

4. Quality Organizations.

5. Good dividend record history based Organizations.

6. Minimum 4 % dividend yield organizations.

7. Expected dividend in the forthcoming years also.