During the results season, many companies declare dividends to share profits with shareholders. At times, equally profitable companies also have a different stance regarding dividend declaration. Why is it so? Are companies which are generous in declaring dividends a good bet for long-term investing? How is it transferred to shareholders?
The reason why equally profitable companies can declare dividends at different levels may depend on various factors. Generally, a company having expansion plans may require a lot of internal accruals to fund the expansion. Therefore, it may want to declare a lower dividend to retain cash on its books. On the other hand, a company may have sold off a certain division, or may not have immediate fund requirement. In that case, it may declare a higher dividend to reward shareholders. Besides, there could be other factors. Companies having solid businesses and a long-term track record of continuous and steady dividend payment would normally be good candidates for long-term investing. However, dividend payment record is not the only criterion on which investment decisions should be taken. One must also consider the other quantitative and qualitative factors before investing in company. Investments should only be done after conducting an in-depth analysis of the company and its future prospects. Dividend is normally transferred to shareholders by directly crediting it to their bank accounts.
Has any specific trend emerged from the annual results declared so far? Which sectors have outperformed or underperformed expectations? Also, which of them offer good opportunities to invest at the moment?
The annual results declared so far have been a mixed bag. Though, overall, they have not been disappointing, Sectors like textiles, metals and auto have reported good numbers. Instead of being sector-specific, we feel one should look at individual, fundamentally sound stocks — especially from the mid-cap space — which are available at reasonable valuations, and buy them systematically for the long-term.
In the annual credit policy announced last week, the RBI raised key policy rates. Many feel this signals a good opportunity to invest in debt instruments. How are the two linked? Which debt instruments can gain on the back of this rate rise? I redeemed about Rs 2 lakh from my investments in equity mutual funds last week. What are my options on the debt side?
Rate increases by RBI generally translate into a rise in borrowing and lending costs in the banking system. Therefore, you may benefit in form of higher rates on your bank deposits or higher yields on the bonds you may purchase. However, if the rates continue to trend higher, you could see the price of the bonds you may have invested in, falling further. If you are a long-term investor, you could hold the bonds to maturity and not worry about price fluctuations. The investment avenues on the debt side could include fixed deposits, bonds, mutual fund debt schemes etc.
The writer is director, Touchstone Wealth