Lack of Clear Dividend Policies Set to Change

Fri, 22 Jul Pre-Open

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There are two major ways in which an investor in stocks can profit from his stock holdings. First, obviously from the stock price appreciation. Second, from dividends. However, there's a difference between how the returns come to investors from these two sources.

Dividends, unlike stock prices, do not hang on the whims and fancies of the stock market community at large. If the business is doing well and generating cash in excess of what is required for growth, dividends are paid out irrespective of the stock price movement.

But is this the case all the time? Do businesses that have excess cash pay regular dividends? As far as Indian stock markets are concerned, dividend payouts are largely driven by many interests. Further, the lack of a dividend policy does not assure regular dividends.

However, there is a good news regarding this issue around the corner. Dividend policy, which is considered as a key parameter drawing retail stakeholders to stocks, is set to get more transparent very soon. The market regulator Securities and Exchange Board of India (SEBI) has recently directed top 500 listed companies to formulate a dividend distribution policy.

As stated in business dailies, this move is initiated so that market participants can get a clearer picture on returns from their stock holdings in such firms. Also, the move is aimed to aid shareholders identify stocks that match their objectives in stock markets.

Some of the regulations that the SEBI has outlaid for the above companies are-

-List out the circumstances under which the shareholders may or may not expect dividend

-State the financial parameters that are considered for declaring dividend

-State the internal as well as other external factors that are considered for declaring dividend

-Inform the shareholders about how they aim to utilise extra profits

The policy enlisting the above reasons will be disclosed by the companies in their annual reports and on their websites.

We believe the above disclosures will offer much transparency as regards the company's capital allocation strategy. Moreover, it will allow market participants to assess the management of these companies on commitment versus execution yardstick.

Once companies make these disclosures, there will be more information available to dig deeper into the operational efficiency and gauge the management's beliefs regarding the growth plans.

As far as our views on dividends are concerned, we give due importance to the dividend yield that stocks offer. We have made our case for this attitude in one of our recent editions of The 5 Minute WrapUp.

Having said that, we have always cautioned our readers to not base their investment decisions on dividend announcements, but focus more on consistency, and without any compromise, on company fundamentals. Further, it might not be prudent to ignore non or low dividend paying companies. The latter could be the ones on a growth path and capable of compounding wealth at a better rate.

To sum it up, do not use the disclosures to invest arbitrarily in dividend stocks. Instead, focus on the most solid, consistent, and fastest-growing companies with clarity in dividend policies.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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