Do not ignore value investing

Long-term investing is not just about generating high returns from stock movement but it is also about constant inflows

For equity investors,sluggish market conditions are a big major concern. And if the lull continues for a prolonged period,then you may be left just holding on to your investment without any meaningful return. Unfortunately,investors have repeatedly seen this phase over the last four years and a majority of long-term retail investors have had no significant returns on their investments during the choppy market period.

While equity investments should ideally track growth in a growing economy like ours,a mix of value investment in your portfolio may just provide it the requisite combination as a host of companies do keep offering decent dividends on a regular basis. Traditionally that has been the way investors used to pick stocks and experts believe that its time that long-term retail investors adopt this approach keeping dividend income in mind,along with the share prices surge. So take a look at your stock strategy and go for some high dividend yielding stocks along with your growth picks. Ultimately,long-term investing is not just about generating high return from stock movement but it is also about the constant returns that the investment can generate in the form of dividends.

Why to look for dividend yields

In May 2008,the Sensex was trading at the levels of 17,000,similar to the current levels. While a number of stocks may be at the same level that they were four years ago,there are some that are trading at significantly higher levels and others that are trading below those levels. It may be tough for investors to figure out where the markets would be in the next three years and to pick a company out of a list of 50 that will outperform the markets but the dividend history of a company may provide some certainty on the companies that can generate returns for you in the form of dividends.

Experts say that dividends are paid irrespective of the direction the stock movement and can provide a higher yield on investment in a weak market. High dividend yield stocks offer a safe haven to investors where safety has greater priority compared to high returns. Hence,even if the market remains volatile,going ahead,an investor can still get a decent return on investment, said Pankaj Pandey,head of research at ICICIdirect.

According to data sourced from ICICIdirect,12 companies out of the list of BSE 200 have generated a dividend yield between 2 per cent and 6.5 per cent in each of the last three financial years. Of these,8 are public sector banks. But for a long term investors these yields can be based more on the entry price. Market experts say that dividend yields grow as the investment turns old as the company declares bonus and also your cost of acquisition is low. Ideally the dividend yield should be higher than the bank interest rates and a lot of old investors are getting such yields on their investment in various companies, said Parag Parikh,founder and chairman of PP Financial Advisory Services.

There are some who say that investors should look at dividend declaration to see the promoters intent. In a number of companies the promoters are sitting on huge cash and they dont need much for growth but still they are not parting money with investors, said a market expert who did not wish to be named.

How does the dividend yield grow in the long run?

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Suppose you buy 400 shares of a company trading at Rs 250 with a face value of Rs 10. If the company declares a dividend of 100 per cent then you get a dividend of Rs 4000,or the yield is 4 per cent in the first year. Suppose the company declares a bonus in the third year then your number of shares rise to 800 and even if the company maintains the same dividend,your yield rises to 8 per cent and this keeps growing with time. Remember,this is other than the capital gains on account of the rise in the share price value in the stock market.

Parikh is of the view that dividend should be a prime consideration for buying shares and traditionally that was the way to know that the company is profitable and you own its shares. Its conventional wisdom. While investing,all that we looked for was whether the company is making profits then is it giving good dividends and that was the only yardstick. I think that people must look for dividend yields when they pick stock for the long term, said Parikh.

There are some who however do not believe in the concept of investment based on dividend yields. I dont subscribe to this theory except for the mid-cap PSU banking stocks which have consistency in profit growth and dividend payout. Invetsment in equity should be done with growth objective, said SP Tulsian,an independent market expert.

The middle path

Equity investment with either growth or value as objectives are two extremes. There are some who suggest the middle path,but slightly skewed towards growth as objective. Experts say that the Indian economy and markets offer high growth for now and equity investment should largely be done to follow this growth and make the most of it but should be mixed with value investment to take advantage of a bad phase in the markets. In a country like India where equity is seen as a hedge against inflation,the nominal return from equity has a larger importance. Value has a place but what is more overpowering objective in India is growth. Investors can look for asset allocation and 80 per cent of the equity investment may pursue growth objective while 20 per cent may go for value investing, said Sanjay Sinha,founder,Citrus Advisors. Sinha says that once the growth of the economy and markets plateau,investors can subsequently shift higher allocation towards value based investing. u

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