Hello,
Have we ever invested in equity markets expecting a dividend ? I do not think so. Dividends that are offered by various companies are totally misguiding. I say this because though a company declares a 100% dividend the actual return that one gets on his investment is substantially awfully low.
Let me justify my point with an example: I hold 50 shares of a company bought at Rs.500 from the open market that currently trades around Rs. 500. Face value of share is Re. 1/- Company declares a dividend of 100%.
Invested Amount : Rs. 25000/-
Dividend Received: Rs. 50/-
Return on Investment from Dividend : 0.2%
You can imagine the low returns that one might get if the share price of company is above Rs.500.
Hence I conclude that all that an equity investor is interested into is the capital appreciation and not the return that he might get as part of dividend. It hardly makes any difference to the pocket of shareholder if the company declares 100% dividend or 200%. This is some serious flaw that I need to highlight.
What can be done ???
Firstly the basis of giving return needs to be corrected. The company provides dividend based on the face value of the share. According to me, if the company has raised the money, the return should be distributed on that amount. If the share has raised the money at Rs.200 from the market during its IPO then the return should be offered on this Rs.200/- rather than on Re 1/-(face value). If there have been multiple follow-on public offers then the return should be provided on weighted average of the offer prices.
Benefits:
1. Shareholders will value the dividend as a substantial part of the return and would like to hold the share not only for capital appreciation but also for dividend announcement.
2. This will in-effect reduce the volatility from the market and also provide some stability
3. It will give a meaningful value to the dividend value (100% is really 100%)
According to me if dividends are distributed the way they are now, they are just a waste outflow of money for the companies as it makes no difference to the shareholders whether they declare 100% or 500% dividend. Hence, either the companies should end the era of giving dividends or change the way they give dividends.
Have we ever invested in equity markets expecting a dividend ? I do not think so. Dividends that are offered by various companies are totally misguiding. I say this because though a company declares a 100% dividend the actual return that one gets on his investment is substantially awfully low.
Let me justify my point with an example: I hold 50 shares of a company bought at Rs.500 from the open market that currently trades around Rs. 500. Face value of share is Re. 1/- Company declares a dividend of 100%.
Invested Amount : Rs. 25000/-
Dividend Received: Rs. 50/-
Return on Investment from Dividend : 0.2%
You can imagine the low returns that one might get if the share price of company is above Rs.500.
Hence I conclude that all that an equity investor is interested into is the capital appreciation and not the return that he might get as part of dividend. It hardly makes any difference to the pocket of shareholder if the company declares 100% dividend or 200%. This is some serious flaw that I need to highlight.
What can be done ???
Firstly the basis of giving return needs to be corrected. The company provides dividend based on the face value of the share. According to me, if the company has raised the money, the return should be distributed on that amount. If the share has raised the money at Rs.200 from the market during its IPO then the return should be offered on this Rs.200/- rather than on Re 1/-(face value). If there have been multiple follow-on public offers then the return should be provided on weighted average of the offer prices.
Benefits:
1. Shareholders will value the dividend as a substantial part of the return and would like to hold the share not only for capital appreciation but also for dividend announcement.
2. This will in-effect reduce the volatility from the market and also provide some stability
3. It will give a meaningful value to the dividend value (100% is really 100%)
According to me if dividends are distributed the way they are now, they are just a waste outflow of money for the companies as it makes no difference to the shareholders whether they declare 100% or 500% dividend. Hence, either the companies should end the era of giving dividends or change the way they give dividends.
