So when you are worried about the ‘growth’ shares you should invest in dividend oriented shares or in dividend yield funds. Right? Wrong, well at least partially wrong.
If you think you will get rid of your bank fixed deposit yielding 9%p.a. and invest in an equity share that yields 6% p.a. (and hoping for a 5%p.a. appreciation) you are being smart. Wait.
When the price of a share falls and keeps falling the ‘yield’ looks very attractive. Indiainfoline is now available at a yield of 6.5%p.a. This is very attractive IF AND ONLY IF you believe that the dividends will be sustained for a substantially long period of time. Funnily, if the market does believe this, the share would not be at such a low price!!
What makes dividend yield shares look good?
a) easy to calculate yield and make it look attractive
b) quick risk-return visibility
c) better understanding of cash flows – so the expectation of the final sale price is lesser
d) looks less risky than a pure growth stock
e) actually a good alignment of shareholders interest and employees interest
So if you do get ‘good’ looking dividend yielding shares take the average of 5 years dividend, not just in the immediate past return. If the company does not have a consistent dividend paying track record, run. When the price of a share keeps falling (and the company refuses to cut dividend for political reasons..) the dividend yield will keep increasing. Make sure that the company is good and that you are sure that the company is doing well.
If you are a senior citizen there is a good chance that you will also be tempted to put some equity in your portfolio..be aware of the situation.
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