Dividends are payments made by a company or corporation to its shareholders, usually after making profits. The company may allocate some of its profits for future business development or as reserves and pay another portion to its shareholders. There are no fixed rules for paying dividend, but it is usually the board of directors who recommend such a dividend. It could be paid quarterly, half yearly, annually or even as an interim dividend. The amount paid will be added to the recipient’s total income for tax purposes.
When someone buys a stock in the market, he obviously wants to make a profit out of it. When he receives a dividend from the stock he bought, it is an additional source of profit. Not all the companies declare dividends; Not all the companies uniformly declare it, even if they manage to.
There is a saying in stock market language : “Never buy a stock thinking that you will get excellent dividend.” True in many cases. Past performance or dividend may not get repeated in future.
In this article let us see how a person, with about 100,000 Indian rupees of investment in April 2006, may have ended up. The selection of companies is at random and the author is noway connected with them or has any interest or disinterest in them.
The source for the data in the table is National Stock Exchange of India Limited
| Scrip | Face value | No. of | Close 1 | Close 2 | Dividend % | Dividend % | Dividend | Profit | Total | % Profit |
|
| Rs. | shares | 31.03.06 | 30.03.07 | FY 05 - 06 | FY 06 - 07 | Amount |
| Profit |
|
| TCS | 1.00 | 104 | 957.75 | 1,234.00 | 1,350 | 1,300 | 1,352 | 28,730 | 30,082 | 30.08 |
| Hero Honda | 2.00 | 112 | 890.45 | 688.75 | 1,000 | 850 | 1,904 | (22,590) | (20,686) | (20.69) |
| Larsen & Toubro | 2.00 | 82 | 1,216.00 | 1,620.00 | 1,100 | 650 | 1,066 | 33,128 | 34,194 | 34.19 |
| AstraZeneca * ** | 2.00 | 162 | 618.09 | 596.20 | 200 | 600 | 1,944 | (3,546) | (1,602) | (1.60) |
| Lakshmi Machine | 10.00 | 46 | 2,186.00 | 2,983.00 | 300 | 400 | 1,840 | 36,662 | 38,502 | 38.50 |
| Godrej Consumer * | 1.00 | 548 | 182.61 | 146.85 | 375 | 350 | 1,918 | (19,596) | (17,678) | (17.68) |
| Aventis Pharma | 10.00 | 52 | 1,930.00 | 1,231.00 | 160 | 320 | 1,664 | (36,348) | (34,684) | (34.68) |
| ITC | 1.00 | 512 | 195.15 | 151.15 | 265 | 310 | 1,587 | (22,528) | (20,941) | (20.94) |
| Thermax * | 2.00 | 321 | 311.35 | 382.75 | 170 | 300 | 1,926 | 22,919 | 24,845 | 24.85 |
| Grasim | 10.00 | 48 | 2,062.00 | 2,093.00 | 200 | 275 | 1,320 | 1,488 | 2,808 | 2.81 |
* Adjusted Close 1 due to stock split / bonus/ rights issue
** Dividend for FY 04 – 05 : 200%
Suppose, a person invests Rs.100,000 in say, TCS by buying its shares on 01.04.2006 for its previous day’s close price at Rs.957.75, he can get 104 shares. Each share has a face value of Re.1. Exactly after a year, the stock closed at Rs.1234. The dividend is 1300% or Rs.13 per share. That works out to Rs.1352. In addition, the investor gains a profit of Rs.276.25 per share, so for 104 shares it is Rs.28,730. These two yield Rs.30,082 or 30.08% as yield in a year (commission/brokerage/taxes excluded.) It is much higher than any bank fixed deposit rate for a period of 1 year in India.
Larsen & Toubro yielded 34.19%, Laksmi Machine yielded 38.50%, Thermax yielded 24.85% respectively, where if he had purchased Grasim, he could have got only 2.81%, which is much less than the savings bank interest rates.
Hero Honda, Astra Zeneca, Godrej Consumer products, Aventis Pharma and ITC returned negative results of 20.69%, 1.60%, 17.68%, 34.68%, 20.94% respectively.
It can also be seen from the table that the dividend payment may not be same for a stock in consecutive years. It is upto the company directors to rise/lower this percentage depending on the profit margin and other criteria.
The investor may learn from the analysis that dividend payment alone, even if is a blue chip company, cannot be a good reason for investment. For a short term or medium term traders and intra day traders this makes no difference at all.