METHODOLOGY
- We started with companies with dividend yield of greater than 4 per cent.
- After that we checked their consistency.
- They should have paid continuous dividend in last five years.
- Dividend payout ratio should be less than 100% of profits earned.
- Earnings growth of these companies should be greater than 10% in last three, five or seven years.
- From the final list we selected five companies based on other qualitative factors.
Jitendra Kapoor was a happy and carefree retiree enjoying his second inning. He was healthy with no responsibilities otherwise. Only regret he had was that his retirement corpus invested in bank fixed deposits were not earning him enough to beat high inflation. He was worried that he may outlive his retirement corpus.
Nevertheless, one of his morning walk friend gave him unsolicited investment advice of investing in stocks instead of keeping it in fixed deposit. His first reaction was that stocks are too risky and are very volatile. Nonetheless, his friend gave him list of 10 companies that paid high dividend last year, which was above the return provided by bank fixed deposits. Add to this the potential of capital appreciation. This was music to the ear of Jitendra, as it was best of both worlds. So he withdrew most of his investment out of bank fixed deposit and equally invested in top five companies shared by his friend, based on their dividend yield.
First few years he received dividend as expected and he took pride in his decision. But soon he started to receive lower dividend by couple of companies and some almost stopped paying dividend. To his dismay he saw share price of these companies also declining leading to capital loss. Few calls to his friends and he realized that companies are not obligated to pay dividend and there are also restrictions on companies on paying dividend.
This story is from the June 2022 edition of Indian Economy & Market.
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This story is from the June 2022 edition of Indian Economy & Market.
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