Thursday, May 3, 2012

Is this the best investment during lean times?

To the naked eye, the difference between an investment returning say 15% per annum and the one returning 17% per annum may not look like much in the near term. But as the time horizon increases, the difference keeps getting bigger. For instance, after 10 years, the investment yielding 17% per annum will have accumulated nearly 20% more money than the one with 15%. And after 20 years, the difference would have gone up by as much as 40%.

Thus, when it comes to investing, even a couple of percentage points of extra returns matter. However, we routinely encounter cases where investors turn a blind eye to the same. Nowhere is this more evident than in the case of dividends we believe. Ask most investors and they will say that they invest in stocks only because of the capital appreciation potential of the same. Dividends are seldom the decision drivers. However, as the example just given shows, such investors are likely to end up paying a significant price for their dividend negligence over the long term.

This is not all. As a leading daily points out, dividend payouts are also likely to be an investor's best friends during lean times. In other words, when markets keep going up and down in a narrow range, it is the dividends that come to an investor's rescue. Take for example the period between March 2008 and 2012. During this time, the Sensex has returned a total of 17.9% out of which more than 1/3rd was accounted for by dividends. And for the BSE Mid cap index, the share of dividends in the total returns was as high as 134%. In fact, had it not been for the dividends here, the total returns would clearly have been in the negative territory.

Thus, as we have seen, dividends not only help propel investment returns over the long term, they also help generate sizeable returns during periods when the stock markets go through lean times. Little wonder, dividend paying stocks should be a must have in one's portfolio.

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