Magic of Dividends - The Real Return !!!

What are Dividends? Are Dividends Useful? Are Dividends Significant? What Impact do they have? Can they, over a period of time, cover Basic Expenses? Can Dividends Compound? Read on...


Dearest investors & friends,

Hope you are all doing well. It's been months since I wrote my thoughts on your site. I have been pretty active on Twitter - @FI_InvestIndia and very happy to connect to thousands instantly there.

Today, I am going to write about a concept which is very close to my heart. And of course, something I am lucky to experience.

When I put this thought on Twitter, there were many who couldn't relate to it. Yes, it's extremely difficult to relate to this idea, unless we experience it. There were many questions asked. In this article, Ill try to throw light on as many aspects as possible.

Friends, keep a note/pencil ready to take down some important points. Don't hesitate to read this article on desktop/laptop :-)

Let's first understand some basic concepts. 

Dividend - A part of the Profits or Reserves paid regularly (typically Annually/Quarterly) by a company to its Shareholders

Let's assume "Growth_Dividend Limited" is a Company which is trading at 1200 per share. It's Face Value is 2 per share. It's dividend is 40 per share annually.

If you are a newbie, to understand some basic Terminologies, before proceeding, please click here

Some more definitions:

Dividend Percentage - (Dividend/FV) x 100 = (40/2) x 100 = 2000% 
Dividend Yield          - (Dividend/Share Price) x 100 = (40/1200) x 100 = 3.3%

Now, let's move a little further:

Most of you will be wondering about the Naming of this Article. Let me explain. 

We all know that in a Business, Earnings & Cash flow defines its Strength. No matter how good the Product/Service is, unless business grows Earnings over a period of time, we Shareholders do not make any money.

Share price of a Business keeps fluctuating based on Market Conditions, Emotions, Sentiments, News, Analyst Reports, Demand, Supply etc. Hence Returns keep fluctuating. If we observe carefully, at any point of time, our notional Profit or Loss will exist. 

But, if we are invested in a Consistent Dividend paying company, the Quarterly/Annual dividend is Real Money for us. It comes to our Account - Tax Free (below 10 Lakh annually). Over a period of time, it can be used for our Expenses or can be Reinvested.

Many businesses have a Dividend Policy. I am personally invested in a Business where 50% of Earnings Per Share is given back to us shareholders in the form of Dividends. There are many companies where as business grows, Dividend also grows. In this case, what happens is, over a period of time, Share price slowly & steadily moves up. Dividends also slowly inch up.

Now, observe this picture carefully. You can click on the picture to visit the sheet also, as you read further.

Friends - Below is past data. Doesn't mean it is the future :-) Just a disclaimer. Take the essence. Not the company names please...

Let's take the example of Maruti Suzuki in this list. It has been a fantastic business over decades. 

In April 2010, Maruti was trading at 1400 per share. Kiran bought 100 shares of Maruti (1.4 Lakh rupees) in 2010. Dividend was 6 rupees. So, the Dividend Yield in 2010-11 was a mere 0.4% (600/140000).

In 2018, Maruti is trading at 8900 per share. Dividend is 75 rupees (moved up steadily from 6 rupees to 75 rupees). Kiran is still holding her 100 shares. 

Now, let's observe carefully:

In 2018, she got 7500 as dividend. On her invested capital of 1.4 Lakh rupees, dividend is a whopping 5.4% (7500/140000). 
Also, today since Maruti is at 8900 per share, her share value is 8.9 Lakh rupees.

Now, over a period of time, if Maruti continues to gain market share and progressively earns, the dividend also will keep moving up. Let's pause and re-read the above example. Please give some time to digest above thought.

Now, in the above list, I have tried to collate this information for some more businesses. I used to own few of them at some period of time in my investment journey.

Majority of companies owned by legendary Warren Buffet, are dividend paying. The beauty of growing dividends comes into play, as we hold the business for decades.

Consistent and growing dividends also, to a certain extent, give us confidence on the Financials of the Business. There might be exceptions to the rule, but I like investing in businesses which have a good dividend paying policy and adhere to it.

Dividend Compounding:

We have all heard about Compounding in Stock Market. But, have you heard about Dividend Compounding? I get goosebumps even by thinking about it.

Look at the graphic below:

As you can see, the difference in returns is enormous between Dividend Reinvested & Dividend Withdrawn.

If we continue to buy more shares with the dividends which we received, the dividends also will compound along with the business share price (assuming that company continues to grow steadily over decades).

Now, a few pointers while identifying Dividend Paying Companies (In screener etc.)

- Business has to keep growing (earnings has to be steadily progressive). Else, dividends won't grow.
- Check Dividend Payout history. Is it regular? Consistent? Growing? Flat? (You can find it in Corporate Actions page in Exchange website)
- Find out Dividend Paying Policy (in Annual Report) and see if they have adhered to it religiously
- Avoid cyclical companies while looking for consistent dividends (where dividends also will be cyclical)

So ,friends... Never ever underestimate the Power of Dividends. It's so Real. So Amazing. In the Longer Run, it can work magic. Yield might be low today. Might look ridiculous. Laughable. 

But, if business compounds over a long time, yield will be awesome.

Imagine - A day might actually come, when the Annual dividend would be the Initial capital deployed. Imagine a day, after 12- 15 years, when Monthly expenses can be taken care by Dividends alone. 

To Start, we need to Believe. I want everyone to experience, what I experience. It's a Long Long Long Road. But, 100% Worth...

I wish you all the very best my dears.

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Good luck,
Fundamental Investor