OVER the last three quarters, closed-ended equity mutual funds have given substantial dividends to investors. Even some open-ended schemes haven’t been far behind. With markets on a roll, companies, too, have been declaring good dividends. Among closed-ended equity schemes launched less than a year ago, dividend payouts have been in the range of 10-25% of the original capital invested. Asset management companies are reporting higher growth in equity funds and inflows are picking up every month.
Investing strategy
While investors welcome any extra money during the festive season, is dividend distribution an ideal approach when one expects high growth in the equity market? There is no definite ‘yes’ or ‘no’ to this question as it all depends on an investor’s cash-flow needs and long-term asset allocation strategy. Steve Jobs once asked investors: ?Do you want a company with our stock price and $40 billion in the bank? Or a company with our stock price and no cash in the bank?? Jobs was talking about creating enterprise value and cash being used for creating opportunities to expand and grow.
Those who invested and stayed put through 2002 to 2014 have seen their money grow manifold. In fact, the downturn of 2008 and 2012 did not dampen returns as the markets recovered later. Those who invested in stocks directly or in equity MFs have see growth both in terms of returns and capital appreciation.
Usually, investors don’t factor in dividends in their asset allocation strategy and end up spending the money. But if the dividend money is invested, the power of compounding kicks in and proves beneficial in the long run. The money can be invested in bank deposits or some other income-generating asset. However, for those looking
at cash flow for routine expenses, the dividend is a welcome addition.
As part of the investment plan, it is always a good idea to record the dividends received and reconsider the asset allocation strategy. One must record all past dividends and check the current prices to calculate the returns generated from reinvesting dividends. If the company or a mutual fund feels that the cash can be better utilised by distributing dividend rather than chasing acquisition, dividend distribution is the right strategy. However, if it feels that the cash can be better utilised by continued investments, conserving cash would be the right approach and investors can reap the benefit through capital appreciation in the long run.
The trade-off
Investors usually don?t factor in dividends in their asset allocation strategy and end up spending the money. But if the dividends are invested, the power of compounding kicks in
Record all past dividends and check the current prices to calculate the returns generated from reinvesting the dividends
If a company or fund house feels the cash can be better utilised by distributing dividend rather than chase acquisition, dividend distribution is the right strategy
But if it feels the cash can be better utilised by continued investments, investors can reap benefits through capital appreciation in the long run
The author is managing partner, BellWether Advisors LLP