1. Our stock universe can largely be divided into 4 interchangeable types:-
a) Blue chip stocks - of very large frontline companies, having a long track record of strong performance and low volatility.
b) Value stocks - that are priced significantly lower than their intrinsic value.
c) Growth stocks - of companies in their early or mid-growth stages having substantial room to grow at a rapid pace.
d) Dividend stocks - of companies that have attained a certain size of operations and do not need large capital investments for further growth.
2. Dividend stocks tend to have high cash flows, which they choose to return to shareholders as dividends, instead of ploughing them back into their business, preferring to grow at a steady pace with a steady stream of income and modest gains.
3. During an economic downturn, dividend stocks exhibit better resilience with very low downside risk, and continue to provide a safe and regular source of income to their shareholders through dividends.
4. However, a high dividend payout ratio may not always be good for an investor as a company could create more value by retaining the money, and reinvesting it for expanding its existing business, or exploring growth opportunities like acquisition or diversification, in order to remain competitive in the long-term.
5. The real test of dividend distribution for a company is, therefore, to make it worth more by keeping it than giving it out as dividend, as it would also be a mistake to retain money if it is unable to generate a high return internally.
a) Blue chip stocks - of very large frontline companies, having a long track record of strong performance and low volatility.
b) Value stocks - that are priced significantly lower than their intrinsic value.
c) Growth stocks - of companies in their early or mid-growth stages having substantial room to grow at a rapid pace.
d) Dividend stocks - of companies that have attained a certain size of operations and do not need large capital investments for further growth.
2. Dividend stocks tend to have high cash flows, which they choose to return to shareholders as dividends, instead of ploughing them back into their business, preferring to grow at a steady pace with a steady stream of income and modest gains.
3. During an economic downturn, dividend stocks exhibit better resilience with very low downside risk, and continue to provide a safe and regular source of income to their shareholders through dividends.
4. However, a high dividend payout ratio may not always be good for an investor as a company could create more value by retaining the money, and reinvesting it for expanding its existing business, or exploring growth opportunities like acquisition or diversification, in order to remain competitive in the long-term.
5. The real test of dividend distribution for a company is, therefore, to make it worth more by keeping it than giving it out as dividend, as it would also be a mistake to retain money if it is unable to generate a high return internally.