There is always a divide between the investors opting for growth stocks or high dividend yield stocks. Dividends promise a steady stream of earnings in the pockets of the shareholders. Whereas growth companies offer prospects of multibagger capital gains to the investors.
Historically, companies which have retained their earnings have outperformed the dividend-paying stocks over the medium and long-term horizons. Compiling a set of data from the Association of Mutual Funds in India it can be concluded that dividend yield companies or funds can be held in a portfolio to manage downside risk. The objective of the investor should not be to earn superior returns from dividend-yield opportunities.
The problem is exacerbated by the double taxation of dividends. The earnings are first taxed at the company level at 10% as TDS above Rs 5000. Later, when the dividends are declared out of those earnings, they are taxed as per the income slab rates of the investor.
However, the companies which reinvest earnings give three-pronged benefits to the shareholders. Firstly, most of the time, the IRR of the reinvested earnings is superior to what could be earned by the shareholder. Secondly, the dividend tax reduces the net income attributed to the investors. And lastly, the capital gains which result from increased share price over a period of time are more than a multiple of 1.
Examples
Take the example of Coal India Ltd., an Indian government-owned coal mining and refining company which is preferred by the investors for its high-dividend yield. However, a casual look at the share chart tells that the share has given negative capital returns over the last five years. It has decreased to more than 22% over the last 5 years and closed at ₹ 198 on Friday.
Similarly, let us take the case of Goodyear India, a leading global tyre manufacturer. It has a reputation for stable dividends but has performed abysmally over the past 5 years. The stock increased only 22.5% over the time period.
Contrast this with Titan Company, one of the long-term holdings of the ace-billionaire investor Rakesh Jhunjhunwala has delivered whopping 315% returns over the previous five years and has a dividend yield of less than 0.5%
From the above examples, we can say that it’s better to go for growth stocks from a long-term investment point of view as they can give you multibagger returns.
Disclaimer
The content in this news article is not investment advice. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution while investing or trading in stocks. Dailyraven Technologies or the author are not liable for any losses caused as a result of the decision based on this article. Please consult your investment advisor before investing.
