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Saturday, January 31, 2009

"Till the dividends come home":-In indian stock markets

A bullish market discounts the element of dividend yields but they gain importance in a falling market.

The dividend yield ratio is computed by dividing the annual dividend per share with the current stock price of the company.So,if the annual dividend is around 40% it means that you gets rs 4 on every rs 100 you spend buying the stocks.This implies that as the stock prices rises,its dividend yield declines and the same stands true the way around too.So,at this point In these time,as share prices are moving down,dividend yield is on its way up.

In a falling market,shares of dividend paying companies becomes attractive in terms of dividend yield.These stocks are likely to outperform the markets when things don't look great in the equity market.And the good news is that a surprising number of companies in India have been consistent dividend payers even through in times when equity markets are bearish.So,a small retail investor with a low risk profile can enter into companies with a high dividend yield ratio.Small retail investors,who are primarily long term players,value high dividend yields.These investors bite this bait as nothing could be a more credible way of knowing a companys position than to see it give dividend cheques to shareholders.In India,the dividend yield of leading stocks has fallen over the last 5 years because of the continued bull run.

I must also say being in the market for last several years,Dividend yield,per se,is not a successful investment tool.At best,it could help identify asset of stocks from which one could pick and choose.So,buying into a company based purely on the dividend yield ratio may be futile.Strong cash flows are the key.The ideal dividend player is a company in a net cash position operating a business that does not need a lot of capital re-investment.So dont go by "ARUN"S theory before not getting it fully.

While profits can be cooked up,sales vouchers fudged,dividend cheques have to be paid.No wonder,the 100 year quote of John D Rockfeller,one of America"s richest man,echoes the sentiment even today.He said,"Do you know the only thing that gives me pleasure?Its to see my dividends coming in."I was 14 years old when i heard ths quote but still it looms large on my head.

Also,taking a call on whether to buy or not depends much on the investment horizion as its about the nature of business and the companys business model.But picking a good dividend stock isn't only about the yield.Investors need to take into account the growth prospects of the business,the overall business environment and the potential movement of the share price.The ideal combination is a stock that pays dividend and is also seen as a growth play.

During uncertain economic times,steady payers can rise rapidly in price,trimming dividend yields.Investors typically seek shelters in utiliies,for example in a bear market.

The most consistent dividend payers,despite being historically stable companies,are still subject to the vagaries of the market,especially if they operate in volatile economies.They are not nearly as risk-free as bank deposits.The prudent approach is to construct a diversified portfolio,with dividend payers at the core and growth stocks,bonds and cash deposits at the periphery.

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