Assets, in which investors invest, like stocks and mutual funds, do have another source of return, other than a change in price, which is known as dividends.
Generally, we are offered two types of schemes, while we plan to invest whether in stocks or mutual funds, growth, and dividend. Investors invest in different assets seeking growth, but they also get attracted towards, dividends, which are part of the investment return that an equity investor receives. The dividend receives get added to their regular income and ease their monthly finances.
But here the question is whether dividends payout is enough of a reason to pick a particular investment option? Well, let us see.
High Dividend Yielding Stocks
Dividends yield measures your earning margin from dividends declared assuming you bought the stock today. For example, if the market price of a stock is Rs 100 and it announces a Rs 5 dividend per share, then the dividend yield is 5%.
Some investors compare this dividend with annual interest from deposits and see where the post-tax return is higher to decide which a better investment option is.
Dividends help long-term investors to gain from regular pay-outs; also their regular payouts can be used as their extra income. In some cases, a company continues to pay a high dividend from accumulated profit to make their dividend yield look good. However, if incremental profits are not growing at the same rate, the market price of the share will suffer.
For example, public sector listed stock GAIL has a dividends yield of 7% or thereabouts which is attractive, but, the capital value or price has fallen 31% in the last year.
This clearly shows that only a good dividend payout is not enough to base stock or mutual fund scheme selection, not even any other asset class.
Mutual Fund Dividends
Dividend Equity Mutual Funds was most preferred to investors who look for extra regular income, but only till it was tax-free in hands. After Union Budget 2020, the dividends received in the hands of investors is taxable.
Well, as per experts, even before this change in the last Union Budget, dividend options in mutual funds were not gainful. This is because, in the case of stocks, dividends payout is an additional income originating from the company to its shareholders, while in mutual funds, dividend payout is basically growth in capital value (including dividend received) being paid out as income. This means dividend payout in mutual funds is the withdrawal of your own profit and not extra income.
So basically, if we conclude, we can say that choosing growth option, in any of the asset class, be stock market or mutual funds, instead of dividend is more profitable. In the case of mutual funds, it’s best to stay away from dividend plans and stick to growth plans where gains accumulate and compound.