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Use Dividend For Wealth Creation

| 4/19/2012 9:05 PM Thursday

Should one invest in the stock market for dividends? Many would suggest that the stock market is for capital appreciation and dividends are but a by-product, and hence, are best ignored. However, our study suggests that dividends are an equally powerful instrument for wealth creation if one has proper strategies in place. This can best be explained through an example. Had someone bought 100 shares of HUL in 1990, which would have cost around Rs 14000 then, the individual would have earned a whopping Rs 1.52 lakhs (not counting capital appreciation) from dividends alone till date. In other words, the income from dividend would be more than 10 times the original investment in 20 years’ time.

The example of HUL is not an exception, and there are many companies that have created this kind of wealth for shareholders. Our cover story brings to you many such examples. It is a must-read story to clear any misconceptions that investors may have about dividends as a lucrative source of income. One of the smart ways to benefit from dividends is to reinvest them in the same company that paid the dividend, as this would provide a multiplier effect. The best part is that the long term capital gains as well as the dividend income is tax free, which means higher post-tax returns.

But why are we doing this story now? Well, the reason is obvious. Many companies would start declaring their full year results, and along with that, they would also declare the annual dividend. This is the time when investors start buying dividend stocks to create wealth over the long term. Our cover story also gives a list of companies which have not only been consistent in paying dividends over the last 10 years, but have also increased or at least maintained the dividend paid per share every year since 2006. The list should come in handy as a ready reckoner for investors.

At its annual policy review meeting, the RBI sprang a surprise with a 50 basis point cut in the repo rate. While I was not expecting any cut, the market consensus was for a cut of 25 basis points. On going through the RBI governor’s speech, one gets a feeling that this could be the last of the cuts in the key rates for 2012. This is because the RBI believes that inflation would continue to remain at the higher levels, albeit in a narrow range. For now, the central banker seems to be more worried on the growth front, as the economy continues to operate below the post crisis trend.

I strongly believe that had the IIP number for the month of January 2012 not been revised downward from 6.8 per cent to 1.1 per cent, the RBI would not have taken this drastic step. There is a limit to which the RBI can push to put the economy on a growth path, and hence, it is time that the government takes some proactive steps to put the economy back on the growth trajectory. If it fails to take some action, the RBI’s efforts would go in vain and would not yield the desired results.

The stock market remained firm during the past fortnight, despite the news from the international shores not being so encouraging (particularly Spain’s debt problem). Nor was the news great on the domestic front, with high inflation, a downward revision of the IIP number and a subdued guidance from Infosys. This scenario suggests that the stock market has formed quite a good support base, and hence, will be able to absorb any negative news very effectively. If there is good news in the coming days, it could turn out to be a springboard for the market. We would not be surprised if the market sees a rebound in the coming days.

 

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