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.
1 comment:
Dear Sameer,
Appreciate your thought on the calculation of dividend income ..
However, i would like to clarify that dividend - as per definition is the portion of corporate profits paid out to shareholders.
Now, it wont be a prudent practice to relate dividend to CMP - Because dividend comes from a part of company's fundamental business operations; which it has earned (unlike Market Prices which fall under the purview of speculators)...
And companies calculate dividend amount vis-a-vis their current Earnings . Like TCS has an average dividend /earnings ratio of 15% for last 5 years. Some companies have stable/step-up payout ratios.
And, Market prices are far more volatile than earnings of a company; so i really doubt whether the method mentioned by you would in-effect reduce volatility. I reckon, linking Dividends to CMPs would indeed inject volatility ..
But without doubt it would raise the importance of dividend to shareholders ,speculators and yeah regulators too ..
- Vishal
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