Monday, May 01, 2006

Dividend yield

Low dividend yield can have different meanings for different people.
To me dividend is a very useful return provided by the company for
today's income needs while retaining sufficient cash to keep growth
engine humming. The future earning is like promise of a party later
in lieu of a starvation diet today. The investor who lives on
investment income needs dividend and has every right to consider 1.5%
dividend yield as low(compared to returns from fixed income). The
investor who is skeptical about the promise of party at a later
date(like me) would not like the starvation diet.

In the matter of dividends I belong to old schools(of Graham). I don't
like companies which pay very low dividend. I can't imagine such a
bright future which requires the management to keep every penny of the
cash the business is generating. The capacity to pay dividends lends
credibility to the assumption that the management expects the current
earning to grow from here.

My past experience in this field shows that dividend yield can be an
important parameter in judging the sustainability of earnings.
1. Most good companies have maintained their dividend at the same
levels even in the time of crisis(M&M 2000-01). This may be an
indicator that the management thinks that the lower earnings of that
years are temporary downturns.
2. Most good companies have increased the dividends as their profits
have grown, thereby maintaining the dividend payout ratio.
3. Many dishonest companies can be nailed down during analysis because
they show continuous rise in earnings but no change in dividend. Such
earnings are either fake or ephemeral.
4. The good companies which pay very little dividends(Software
Infy/TCS) haven't really achieved anything much by retaining the cash.
I would have been happier if these companies paid more liberal dividends.

I'm not convinced by the argument that you can get the same return due
to rise in the price of stock. In such cases I've to (1) make an
assumtion that such price rise is permanent (2) I've to liquidate a
part of my holding to satisfy my income needs.

I've reservations on both counts. Capital gain is not comparable to
dividend till the gain is booked. If I've to reduce my stake in a
company just to get enough cash for my current needs, then it doesn't
solve my purpose.

Posted: Nov 28, 2005


GistOut said...

Cited in Value investing metaphors & analogies

Dividend Yield said...

I would like to share dividend yield support. It is a moment when the actual yield of the stock becomes higher than the industry average.

Preferred Stock


A high dividend yield could be a sign of trouble.