Performance Supports Dividend

 Despite the associated risk, equity investment has proven to be the best performing investment window, whether in a bullish or bearish market when compared to other investment options like bonds and fixed income instruments in the money market. Typically, stock returns are derived from capital appreciation, dividends and even bonus issues. Dividends payment have historically accounted for 20 to 40 per cent of the average annual stock market returns. A lesser known fact is that reinvested dividends have provided for between 44 to 97 per cent of historical stock market returns.

      During tough market conditions such as the down market that we are now experiencing, investors should realize that counting their losses will not prevent further losses. They should rather change their investment perception and tag along with the market as it presents itself. Investors should take advantage of the opportunity of low priced equities to take position in anticipation of their third quarter and full year earnings of quoted companies, considering the present high dividend yield of stocks.

       For now, there is expectation of corporate results, coupled with hunger for information that can drive the stock market, since liquidity level remains tight and the government has failed to look into the plight of its citizens who lost fortunes in the market as a result of deteriorating economic situation. The falling prices of equities on the floor of the exchange has pushed dividend yield of many stocks and some sectors up. 

But given the uncertainty of corporate earnings amidst the current economic slowdown, the market is probably showing that the dividend drop which has largely been concentrated on the financial sector would spread over to other industries as well. 

Investors should be careful as the outlook for dividend growth in general in 2015 is slim, since some of the recent dividend drop in the financials by companies won’t be felt until next year. However, if you can achieve at least anything above 5 per cent yield to cover the rise in inflation, you would be able to weather any short-term and long-term weakness in the stock market. 

This should not be interpreted however to mean that I am recommending the transfer of a huge portion of your long-term portfolio to bonds, which are normally sold to retirees as a ‘safe and reliable source of income.’ You do get a fixed payment every period quite understandably, but the purchasing power of this payment declines over time. 

Thus a very good strategy over the long run is to create a diversified portfolio of stocks, that have shown consistency in raising their dividends year after year and which spot an attractive dividend yield for your consideration. 

Here, it’s necessary for investors to know how the yield is computed, whether based on forecast or historical dividend. Dividend yield is calculated by dividing the latest dividend with the current market price of the company. Higher yield does not guarantee increase in dividend payout.