Widely read:
Who doesn't love dividends? A portfolio dedicated to companies that pay dividends regularly is one of the best sources of steady income. And not just that. If you choose to reinvest your dividends, it amps up the power of compounding. And in our April 2023 edition of Wealth Insight, we covered a unique way to approach dividend investing: dividend-growth investing.
But here's the dilemma many investors face when steady income is not their investment goal. Should they invest in regular dividend-paying companies?
Dividend-paying companies have a reputation for lacking on the growth front.
And at first glance, this seems obvious. To put it simply, you need money to pay dividends.
And more often than not, the only time companies pay out high dividends is when there's a lack of growth opportunities, which means chances of capital appreciation are also minimal.
But maybe we are getting ahead of ourselves. So let's see what the data has to say and verify if dividends come at the cost of capital appreciation.
We looked at the five-year median dividend payout ratio (FY13-FY17) of companies with an m-cap of greater than Rs 500 crore. Next, we checked how the companies that paid no dividend fared against the companies with a dividend payout ratio of 60 per cent in terms of PAT growth and share price appreciation from FY17 to FY22.
Here's what we found.
As you can see, more than 60 per cent of the companies that paid no dividends outpaced companies that paid dividends in terms of PAT growth. And the share prices of the former also grew at a much faster rate, providing its shareholders with significant capital appreciation.
So, there's a strong correlation between a high dividend payout ratio and low capital appreciation.
What should you do as an investor?
Like in most of our exercises, the answer is the same: invest based on your goals and risk appetite. If capital appreciation is your goal, you will fare better investing in a company that has a long runway from growth and a low-dividend payout ratio.
And if regular income is your goal, you should spend your time building a dividend portfolio and should check out our latest April 2023 edition of Wealth Insight.
Suggested read: Not all capex lead to growth
This article was originally published on April 04, 2023.
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