A new approach to dividends

A good majority of Indian equity investors are guilty of ignoring dividends. I mean, they obviously welcome whatever money comes through equity dividends, but that's about the only interest they have. The sums are generally too small compared to what they are really looking for in equity investments, namely, big gains in stock prices. For anyone but a short-term trader, this is a mistake. Paying attention to dividends can do much more for you as an investor than just the rupee amount of the dividend. Most people buy a stock with the goal of selling it at some multiple, so collecting pennies from dividends is not part of their agenda.

India is a growing country. I don't mean in the broad economic sense - although that's certainly true - but in the sense of what Indian equity investors are interested in. Look at the major indexes like the Sensex, Nifty and others. They all exist in versions which take dividends into account - the TRI versions - but the plain stock-price-based versions are the ones that get quoted and used all the time.

When it comes to dividends as a factor in choosing stocks, the obvious concept is the high dividend yield. However, this hasn't really worked, nor do Indian investors trust the concept. A high dividend yield and other indicators of value like a low P/E are more often likely to indicate a problem with a company, especially in a growth-oriented economy like ours.

However, our cover story of 'Wealth Insight' April 2023 issue takes a step in a different direction. Here, we are using dividend-related characteristics as an indicator and a filter for companies that are investment-worthy of other factors. This idea is that of using dividend growth, that is, sustained growth in the level of dividends, as a filter for a robustly investment-worthy stock. There's nothing radical in this idea itself; in fact, we tackled a version of it more than a decade ago in this magazine. However, I came across a detailed and novel treatment in a book I stumbled upon recently.

The book is called 'Dividend Growth Machine' by a man named Nathan Winklepleck, an investment consultant and a Portfolio Manager. The book is available on Amazon. In this brief and easily readable book, Winklepeck lays out a nice methodology for generating superior returns from dividend growth stocks. Note that 'dividend growth stocks' here means stocks whose dividends are growing, not growth stocks that give dividends. However, his approach, as well as the assumptions, are entirely American. Dividend awareness has a much longer history in the US, and many of the long-established dividend-paying companies in that country have no equivalents in India.

So to make this concept useful to our readers, my team and I have created a variant of the idea that is suited to Indian investors and Indian stocks. We have created a detailed methodology that uses this concept and adds many other financial filters to arrive at a set of interesting companies that can be investment candidates. We have taken ten of these companies and discussed them in detail, as well as discussed a set that almost made it but still needs to be done. Some companies will be unfamiliar names, and some will be well-known ones. As always, treat this whole exercise not as a cut-and-dried recommendation list - for that, we have our Value Research Stock Advisor service - but as an idea generator.

We are excited about this new approach, so turn to page 33 of 'Wealth Insight' April 2023 issue and start reading. Do let me know what you think of it.