Stock Market Investing | Dividend vs Growth stocks - YouTube

So let me start today's video by telling you three very short, but very,

very important stories regarding stock markets.

This will help you gain a fundamental understanding about dividends.

So the first story is about a company called Majesco.

So Majesco is an insurance technology provider.

And in 2020, it decided that it is going

to give massive dividends, massive dividends.

So it gave out massive dividends for which the yield was approximately 1000 percent.

I'm talking 1000 percent.

The yield was one thousand percent.

The stock was trading at approximately 250-300 levels.

And then it rose to approximately one thousand rupees. Then,

now it is trading at ninety rupees.

So a company that gave massive dividends, it has now almost tanked,

that's one. Second story is about a company called ITC.

Now we all know that ITC has very stable cash flows.

I have made a separate video on it.

You can go and watch it.

So ITC has very stable cash flows and it gives dividends every single year

in the range of five to seven and a half percent.

So very stable cash flows, gives a lot of dividends.

And ITC has been a relatively stable company. Third company is Google.

Google gives Zero dividend. Over the last 15 years,

this is how Google has grown in terms of its portfolio size.

So it started out at six point one three eight billion dollars in 2005.

Now the valuation is two hundred and twenty billion dollars.

I'm talking about billion, not million.

So it's at 220 billion dollars.

This is amazing. So 3 different type of companies,

one gave massive dividends, it tanked.

Second is a stable company with stable

cash flow, gives out dividend regularly, and third is Google.

It does not give any single rupee in dividend, but the company itself has been growing.

So what type of company should you be investing in?

Now, many of you would say that hey Akshat

we are not interested in playing the individual stock game.

We are mutual fund investors.

So why should we even listen to this video?

You should listen to this video because

even your money in Mutual fund, it gets invested eventually in stocks

that either pay dividends or do not pay dividends.

So on this video, we are going to essentially understand three things.

Number one, should you be buying stocks that give out regular dividends?

That's one. Second,

we are going to take a look at how you should develop your portfolio,

how many dividend giving stocks you should have in your portfolio.

Third, I'm going to talk about how I am investing in dividend giving stocks.

So let's understand the entire concept of dividend.

Very, very important video. Please stay tuned.

Please watch it till the very end

and just for fun now, I will start putting trivias in the description box.

So today's trivia is, check the description box, but today's trivia is

that tell me that why do PSU companies give out a lot of dividends?

I will post the answer sometime tomorrow.

It will help me understand that you are

intuitively learning some things from these type of videos.

Press the like button and let's get this video started.

So number one,

let us try to understand that

why is it that companies pay dividends? Now, essentially whenever you're buying

a stock, so let's say that you're buying ITC or HUL, what are you doing?

You're buying a business,

you're buying a business, you're not just buying a stock.

Stock is just a representation of a business.

When you go and buy ITC stock or Hindustan Unilever stock or Tata Motors

stock, you are essentially buying what? You're buying a business.

This is a very important point.

Now, every business model, be it Tata Motors, Hindustan Unilever, they grow with time.

It's like a living human being, so it grows.

So businesses also grow, they change the nature.

And therefore it is very difficult

to predict how a business is going to do. So

now, let's imagine let's imagine a case

that HUL, right. Now HUL has been a very stable company.

It has been growing over the years.

So what they have is that they need to grow.

Every company needs to grow, every human being needs to grow.

So essentially, what is HUL trying to do?

What is the eventual goal of HUL? HUL'S goal is to grow.

That is what a simple one word answer here would be.

Now, how do companies grow? So companies

grow by taking money and investing in new projects.

For example, instead of five factories

that HUL currently runs, it might start running 100 factories.

For that, it needs to put in more money.

It needs to invest. Right.

So this is called as project financing.

I'm explaining it in very simple terms.

This is almost an MBA class, give it a thumbs up, MBA is very expensive.

All this knowledge is free.

Now, how are these projects financed?

The first option is that HUL can go to a bank and it can take a loan

from a bank and it can pour in money and finance the project.

But HUL is already a big company that does not need a loan.

So it mostly funds this project from operations income.

So you must have seen on the balance sheet

that there is something called operations income.

So this operation's income actually finances their projects that if HUL has to go

from building five factories, to 100 factories.

It can literally pick up its operational

revenues, all the stuff that it is selling in a year, whatever money is coming in,

it can pick up that money and use it to grow their business.

So this is called project financing.

Now every project finance has something

called as IRR, internal rate of return, don't worry.

Right.

And you will understand all these things very intuitively.

So internal rate of return.

I've given this example before

that internal rate of return means that,

for example, my internal rate of return is 15 percent.

Why?

Because I believe that I can grow my money, whatever I'm putting

in the stock market at 15 percent. Now, will I go and and invest in an FD?

The answer is no. Why? Because FDs only

give me six, seven percent, my internal rate of return is 15 percent.

So I will make the investment in the stock

market because my IRR is 15, which is much higher than the FD returns.

Now, if someone else's IRR is five percent, they will say that

we don't want to play the stock

market game, we will simply go live a peaceful life and invest in an FD.

They are not incorrect. I'm not incorrect.

Right, both are fine. Similarly, companies also have their own

IRR, while making this project financing decisions. So many times,

what happens is that HUL, for example,

in the current year, let's imagine that it earns a hundred crores.

Right now it is sitting on all this cash, all this cash.

Right.

And now is not getting any projects that it wants to invest in.

It is saying that, you know what?

We have already 100 factories now.

We don't see any point in building

the hundred and one factory, but we are sitting with all this cash.

So what do we do?

So then they give it out in the form of dividends to

their shareholders, right?

So this is the money that you get in form of dividends.

This is an oversimplified explanation.

This is something that I will hope

that you will remember that if company is sitting on excess cash and it does not

know what to do with it, it does not have more projects to finance

which will serve its IRR, which will serve its IRR,

it just tells the investor that just take this money and go and invest yourself.

Right.

So this is the reason why companies declare dividends that they do not have

better project financing opportunities or investment opportunities.

They just go and tell the shareholders that, hey, take your money.

We have made a lot of cash this year.

Just go and invest yourself in different projects, FDs, stocks that you deem fit.

This is the primary reason why companies

declare dividend that they do not have better reinvestment opportunities.

Now, answer in the comments that what do you think would have happened

that if HUL would have just kept this 100 crore rupees in their bank account?

They would not have invested it, this money would not have grown.

It would have just been sitting in their bank account eating junk.

Right.

And current account, you get zero interest rate, by the way.

Right. So this is a very interesting fact.

So I run multiple companies

and the current account money that is sitting in my bank account.

I get zero interest rate on it.

So similarly, if you HUL

is keeping this entire 100 crore in cash flow in their own bank account.

They are making zero rupees on it. Due to inflation next year

this money will come down.

So therefore it is better to declare the dividends.

So this is the number one reason.

Now, there are multiple other reasons

that it adds to the signaling effect that if a company like ITC gives out

dividends, it tells the shareholder that this company cares about

their shareholders, people feel really good that, hey,

we are getting dividends from the company that we have invested in.

They feel like a family member.

So it acts as a signaling effect also.

So these are a couple of very basic

reasons why companies declare dividends in the first place.

Second, let us try to quickly understand that

is it a good thing that the company is

paying dividend or is it a bad thing that the company is paying dividend?

So let us understand this from an example.

So right now, ITC is trading at two hundred and eight point six.

So you as an investor, how do you make money that if this share

price goes to 220, you will be making money approximately 11.4 rupees per share

right. Or if the company is giving you dividends,

for example, if you take a look at here, this particular tab,

the dividend returns are higher than it would be because ITC usually has

a dividend yield of six to seven point five percent.

These are the two ways in which you are making money as a shareholder.

Now, is it a good thing or a bad thing that the company is paying dividend?

My short answer is that it does not matter right. Now,

you would say that I heard of Mr.

Warren Buffett, he invests in companies

that pays a lot of dividend and he has strongly advocated it.

Yes, he has advocated the fact that you should go and invest in companies that are

paying regular dividends, because according to him,

this is a good sign that if a company has stable cash flows

and if it is giving out dividends, that's a good sign of a stable business.

Right.

He's not investing in companies because they are paying dividends.

He invest in stable businesses and they end up paying dividends.

Let me just very, very quickly, right,

without spending too much time here, let me show you the financials of ITC

and you will see that how stable a company this is, even during pandemic, it's sales

actually rose. So from forty five thousand crores to 50,

52, 51, approximately the same 51905

and profits have been somewhat stable

again, very, very stable growth.

It has stable growth, therefore it has options of giving stable dividends.

Similarly, Coca-Cola gives a dividend of two point five percent.

Now you will say that FD

returns are like seven percent in India, Coca-Cola is giving 2.5 percent.

What's the big deal? Actually, there is a huge deal.

In the US, the inflation is very low. In India, inflation is massive.

It's up to five, six percent.

So the two and a half percent of dividend in Coca-Cola in which Mr.

Warren Buffet is an investor,

that in real terms comes out to be more than ITC dividend.

That's a very interesting fact. Now just for fun,

I will put a picture here of companies in India that are paying massive dividends.

You will be very tempted to invest

in companies like Polyplex because it gives a dividend yield of 17 percent, NLC, PNB

like 14 percent, 13 percent yield its massive.

So just look and zoom on this picture for fun.

It's very, very interesting.

This will give you an understanding of what type of companies are giving

dividends. Now just to complete the thought process there

that is it a good thing that the company is paying dividend or a bad thing?

It really depends on the type of business,

but generally speaking, it does not matter at all.

So let's imagine that ITC in total was paying a dividend of hundred crores,

the total dividend that needs to go out to all the shareholders.

So if it was hundred crores. Now in case ITC decides that we are not going to pay

dividends on this, then what happens to this hundred crore?

It gets added to their balance sheet, right.

It gets added to their balance sheet

and that further propels the price of the stock.

And what did I tell you earlier?

That how do investors make money?

Either the stock prices go up or the dividend yield goes up.

So if they are reducing paying

the dividends here and this is going up, then honestly, it does not matter.

What matters is that how productively and

the economic concept pertains

to the productive use of capital, productive use of capital.

Now, if this 100 crore rupees can be used by ITC

too generate a growth of, let's say, 10 percent, right.

10 percent

and you if they pay you a hundred crores to you or me and if I can generate 15

percent on it, then am I better off taking the dividend or not?

The answer is yes. Right.

But if you are an FD investor and you are making only seven percent and ITC is

growing your money at 10 percent, then are you better off or worse off?

The answer is that you are worse off.

So it does not matter.

The company is paying dividends or not as long as they are reinvesting your money.

Your money is that the cash flow that they

are making now, you're the owner of that money

also, you are the part owner of that money.

If they pick that money and are able to grow it, then you will anyways benefit.

So it doesn't matter from that angle.

So I hope that this complex topic is clear to you. Now just to consolidate this point

further, here is another table that I would want to take a look at.

And this has names of some of the biggest

companies in the world that have exhibited massive growth.

If I ask you to name top five companies in the world, few of them will be on this list,

they pay zero dividend but have exhibited massive growth.

Their share prices have gone up and they have benefited investors.

So, for example, Google, Alphabet is Google

and they do not pay any dividend and their growth has been massive.

Same goes for Amazon.

Same goes for Alibaba, zero dividend.

Same goes for Faceboo, zero dividend.

But you will start seeing certain trends.

So this is important to decipher

and this brings us to point number three.

Point number three is that there are

certain types of businesses that pay dividends

versus not and this ties into what I was explaining earlier.

Now, if you take a look at that chart

that I just showed you, Amazon, Facebook, Google, Alibaba, zerod dividends. Why?

Because these are tech firms, they have great investment opportunities.

You might have heard that in Reliance jio, Jio platforms,

Facebook, Google has made massive investments.

These are investments.

They need money so they can pay it out in dividends.

They are saying Facebook,

Google and Amazon are saying that we are growth companies,

we will anyway grow your money.

So what will you do ny taking the money? Give it to us.

We will grow it for you. So that is what is happening with these

tech companies and they are somewhat justified. Now on the other side,

and please take a look at the trivia,

because this is where the answer emanates from.

If you take a look at utility company,

for example, electricity generation board or very, very stable companies.

They give out dividends.

Another feature is that if the company is

very mature, right, then it might start giving out dividends

because the company has grown from this to this.

It is already very big.

It does not have any new investment

opportunities, so it starts giving out more and more dividends.

So just to conclude this point that, hey,

is it good, is it bad to invest in dividend giving companies?

It does not matter.

What matters is that you are picking up quality businesses here right in the first

type of business, which are stable cash flow, utility type of businesses and type

two businesses, which are technology growth oriented.

I have said earlier in my multiple videos that you should invest in what? Growth stocks

plus you should invest in stable stocks or defensive stocks.

This is the same concept here, right?

Explained in another way through dividends.

So Warren Buffett usually tends to invest in these type of companies.

Right.

Which have stable cash flows, Coca-Cola type of companies with organic growth.

He hardly makes any investment in tech companies.

So I hope that this concept is clear that you should have both stable defensive

stocks and aggressive and growth stocks in your portfolio.

It is very important. So this brings us to the next point.

And we need to understand that what are

the pros and cons of dividend, pros and cons of dividend?

Now, there are three key points that I would like to cover here.

So first is regarding your age, right?

So if you are someone who is at a older age, let's say 45-50 plus,

and you require a stable income source where you do not have to do SWP,

systematic withdrawal plan, or if you are doing a systematic

withdrawal plan, then you should pick up stocks that are dividend giving.

Right. For example, my mom and dad,

they deliberately asked me that hey Akshat, tell us they don't say hey Akshat, they just come here and tell me this,

right.

So essentially, they invest in dividend giving stocks.

They ask me that what dividend stocks they can buy.

And it makes sense at their age to invest in more dividend oriented stocks.

That's one.

If you're young fairly your portfolio size in dividend stocks should be less right.

You should be more growth oriented. That's point one.

Point two is around tax treatment. Now without becoming a CA

I'll just explain you the basic point about taxation on dividends.

Up until last year, there was something called as dividend distribution tax.

This was levied directly on companies.

For example, if ITC used to give out

a dividend of seven point five percent, ITC used to file dividends on your behalf.

So there the tax treatment was on the lower side that you used to pay less.

Now that rule has changed and now dividends become a part of your income.

So if you're a high earner, it is a bad move for you.

So the more dividend stocks that you have

on your portfolio, the more tax that you will have to pay.

Now, I'm not a CA, I will not get into the taxation treatment here now,

but simple, easy to understand lingo, that nowadays government wants to make

more money, so they will keep on taxing you more and more.

So this is one more hathkanda of the government to taxing more by turning around this DDT rule,

dividend distribution tax rule and linking it to your personal income tax now.

So you end up paying more in dividend stocks.

But having said this,

there is a massive benefit in terms of owning dividend stocks.

One is that if you are owning good

dividend stocks, then your cash flow gets stabilized.

So, for example, if you're paying EMIs on your house and if you know that every

year I'm getting a stable cash flow from ITC dividends, then it's fine.

Right.

I mean, there is a sustainable source of income for you.

It becomes like a passive source of income.

It becomes like a passive source of income for you.

You don't have to work for it.

Company works for you and they give you a dividend.

It's good and reliable source of money.

So it's good from that angle.

So this brings me to the final part of the video that what is it that I am

doing in my portfolio and how am I going about investing in this?

So, yes, I have shown it earlier that I follow the principle of diversification.

I keep cryptos, I keep real estate investments,

I invest in aggressive stocks, I invest in defensive stocks, stable stocks.

In fact, if you watch my analysis of ITC, you will understand that I have invested

in ITC also. Why? Because it's a dividend giving stock.

So I need a little portfolio where I know

that I'm going to get reliable cash flow and that is the reason why I hold ITC.

Now, if you are good at stockpicking and if you are a seasoned investor,

go and like me, buy ITC and similar dividend giving stock and

optimize your portfolio.

Otherwise, my suggestion is now depending on your age, you must have around 15

to twenty five percent of your entire capital in dividend giving stable stocks.

So what are these stocks?

I think Smallcase has done a wonderful job on it.

If you just go and type dividend

aristocrats, this is a very good Smallcase for you to consider.

You can do a simple SIP and start investing in it.

You can take a look at the stocks and weights, these are excellent companies.

Asian Paints, brilliant. Bajaj Finance, very good.

Finolex, Excellent.

HDFC Housing Development Finance Corporation,

it owns a part of HDFC Bank, wonderful company, good mix of company, ITC Nesko.

All these are very, very good companies and they pay dividends.

So you must dedicate your portfolio on these type of stocks.

So I hope you found this video to be

useful and informative and do check the description box.

There's a trivia question I would want you

to answer that and I will post my answer tomorrow.

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