Dividends are a small portion of profits shared by the companies to their shareholders. Under the current taxation regime, dividends are tax free in the hands of the investors. While building a portfolio, one needs to have a judicious mix of stocks that can provide long term stability, growth impetus and regular payouts in the form of dividends. In general, I am close to having a stable portfolio which I believe can give me an average 6-8% return p.a. through dividend payouts. Sounds too good to be true.. Let’s see..
I know one argument could be, why stocks.. they are risky.. why not park the amount in a savings’ bank account and earn 6% p.a. Well that’s an approach. However, beyond a certain limit, you will have to pay tax on the same too. Moreover, in stocks, if you invest in good companies or businesses as I will explain next, you will get capital appreciation. So imagine, you get a regular 8% payout and capital appreciates at 10% p.a. What more can one expect as an investor.
Stocks / Shares are instruments through which an investor owns a part of the company i.e. she is a co-owner amongst millions of others. When we pick stocks, people have different tastes, strategies, choices, analysis, charts etc. While I don’t discount any of them, personally, I feel it’s basically understanding the business and buying a business. In Peter Lynch’s Beating the Street, there is a chapter on “The Miracle of St. Agnes“. It’s an amazing, awe-inspiring read where a bunch of school kids beat the best fund managers. Why .. In my understanding, they bought business they understand. As an investor, one needs to get some basics on stock picking (which I have covered in an earlier post) and get down to identifying business that she feels will be the right choices to invest.
With this pre-amble, I would like to focus on the matter on hand. Dividends.. How did I do this past year.. How my investments are stacking up and what kind of returns has my portfolio delivered. I will give a detailed analysis of the same below, but to start off, I will pick 3 of the most recent dividend payouts.
Hexaware declared Rs. 2.40 as dividend, NMDC declared Rs. 9.50 as dividend and REC declared a Rs. 12 dividend payout. How does my portfolio look?
I invested in these stocks sometime back and hence, my cost price is on the higher side. If I include all 3 stocks, I got an overall dividend payout at 5.20% of my investment while portfolio is down 20%. If I consider just NMDC and REC, my dividend payout comes to 7.07% and my overall portfolio is down 25%.
If I consider my overall portfolio and all dividends received from April 1 2015 till date, I have received a total of 2.53% dividend with my portfolio loss of only 1.5%. Considering the volatility and amount of correction and wild swings, I think this is a decent return.
A similar exercise with wife’s portfolio shows that she received a 1% dividend with a portfolio loss of 17% (mainly due to ONGC). Again, I am not overly worried and have confidence that this strategy with benefit in the long run.
What do I plan to do next?
Of course, buy more and average out the stocks in my portfolio. The real test would be FY16-17 returns. Fingers crossed..
With the dividends received, I have routed them to some of MF investments. The latest dividends from REC and NMDC will be used to buy either of the stocks as they are pretty significant dividends. So my strategy is simple.. Top-up the dividend payout and buy more stocks or MF units..
Let me know what do you feel about this strategy…