Dividend or Buyback: Which Is Better for shareholders?

It is seen that recently few large companies announcing the buyback of shares. Actually, they had huge cash surplus and wanted to return money to their shareholders and do not have other avenues or opportunities for investments. The other way of rewarding shareholders is dividend payout.

dividend or buyback

Even in public sector companies which are cash rich, usually maharatna’s, government normally requests them to pay out dividends liberally. Apart from regular dividends, these companies declare special dividends and one-time dividend too.

They distribute these to their shareholders when they have a large amount of unexpected gains. Which angle should be considered by you regarding purchasing/selling shares, dividends or buyback of the company?

What does dividend payout indicate?

When a company is making a good amount of money (profit) and is cash rich, it declares a dividend. A dividend is a cash payout by the company to its shareholders.

Taxes and dividends are two things where companies cannot fool around. They are the real thing, where the company has to make payouts.

Must Read: How to recognize a dividend paying company?

Dividend payout is an indicator that company is performing well in commercial terms. And is willing to share its rewards with the shareholders. A higher dividend yield (a dividend expressed as a percentage of a current share price) is a result because of higher dividend payout.

After price to earnings ratio (P/E ratio)  and price to book value ratio (P/BV ratio), the dividend yield is the third important factor of valuation of the company.

A stock is considered to be under priced if it shows high dividend yield ratio. It acts as a barrier for the stock falling below certain predetermined level. The dividend is an indicator that the company is performing well, has good cash flow in hand and is on the growth path.

Why company buyback shares?

When a company buys’s its own shares from its shareholders, it is called buyback of shares. It is one of the ways for rewarding its shareholder other than the dividend.

Shareholders, if they want, they can surrender their shares to the company and get their money back, usually with a small upside margin.

Must Read: How to start investing for a useful purpose?

Usually, when companies offer for a buyback, they offer a premium over the market price. That is, suppose the current market value of a certain share is fluctuating between Rs. 1000 to Rs. 1100. Than company offers to buyback it for Rs. 1200. That is an upside margin of Rs. 100 to Rs.200 per share.

When the company buybacks the shares, then those shares will no longer exist. The number of outstanding shares of the company gets reduced this increases earnings per share (EPS).

When the companies buybacks its shares, it is an indication that the company has the confidence that the share value will rise to that price level in future. The buyback price acts as a psychological base for the stock. (Rs.1200 as per our example).

How do dividends versus buyback impact valuations of the company?

Buyback and dividend indicate the company has cash, but not many productive investment opportunities. Both tend to impact the valuation of the company because cash is flowing out of the company.

Usually, investors are more interested in growth rather than a dividend. Because the growth of the company reflects more clearly on valuation.  Few companies like D-Mart or Eicher distribute low dividend but are still high on valuation.

Must Read: All time stock trading techniques that you should follow

Because of the buyback, there is a reduction in shares outstanding which boosts the earnings per share, but it results in downgrading the price per earnings ratio. This impact’s on stock prices in the neutral or negative way.

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Why and how volume is important in share trading?

The volume of trade is a measure of securities (shares, bonds, options, futures and/or commodities) traded during a day. In other words total number of buyers and sellers exchanging securities over a period of time, which is usually a day.

importance of volume

In other words, it means the total number of shares that changed hands between the buyer and seller. Their volume is high if shares are more actively traded. Conversely, their volume is low if shares are not much traded or not traded at all.

Must Read: Top ten-day trading secrets for beginners

Say for example if share volume of the day for a particular company was 1,00,000. It meant that there were 1,00,000 sold by someone and bought by someone on that day. Combining all the listed companies whose share had been traded is called volume of the exchange.

The volume gives only the information of market activity and liquidity. A higher trade volume for a specific company means higher liquidity, and the share is active. For example, usually, blue chip companies have high trade volume and penny stocks have low trade volumes. You can also get the list of high trade volume companies from any stock advisory company.

Though volume alone does not provide any important information as such, when volume data is read in conjunction with support and resistance levels, plays an important part.

Must Read: All time stock trading techniques that you should follow

Data regarding volume trades of a share is available on the exchange website. Along with its present price. It is for a day, 5 days, 1 month, 3 months, 6 months and 1year are available, of all listed company at the exchange. Or else you can get from firms providing nifty future tips.

Example – Let us take a scenario that company breaks a ‘resistance level’ and moving up further. And since it has broken through the critical level, prices are expected to go up more in the future.

Volume traded on the day is suppose 3.5 lacs were exchanged. Assuming, the company under consideration on a normal day trades 10 lacs shares. Now traded volume, which is 3.5 lacs is way below average. That means big traders are not trading. Next, say if traders decide that they are bearish on the share. They sell their lot and cause panic. You can get volume list from firms providing nifty option tips. And share prices go down the next day. Vice versa is also true. This is the importance of volume.

Volume is one of the important factors for technical analysis. They work both for resistance and support levels. Generally speaking if the price is showing an upward trend, volume should also rise, and vice versa.

Must Read: How to take first step to make money in share market?

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How to recognize a dividend paying company?

When the company makes a profit, it distributes a part of its earning among shareholders. Amount (percentage) and date of distribution is decided by the board of directors and paid to a class of its shareholders. The dividend is usually paid by cash (cheque or ECS), usually once in a financial year.

How to recognize a dividend paying company

The most important factor in determining a dividend is company’s net profit. The company will earn a good profit if it is a dominant player in its sector or industry. And also if it has a durable competitive advantage, and is ahead of its peers.

Let us see which all companies will pay dividends and how to identify those companies. You can also make money in share market without investment.

There are certain characteristics that one should look for identifying dividend paying company. Let’s see them one by one.

  1. Free cash flow of the company

Total cash generated by the company, during a financial year is cash flow. After deducting all the expenses etc, the company is left with some cash. This cash is called free cash flow. The free cash flow by the company can be used to either expand its operation or pay dividends. After covering their future expenses. If some cash still remains then this cash is paid to shareholders as a dividend.

What should the dividend investor look for? He should look for cash flow history of 5 to 10 years. He should also see for its dividend per share for the same time duration. If both are rising at an almost same rate, then the investor should go for it.

Must Read: How to take the first step to make money in share market?

  1. Dividend history of the company

Company paying an irregular dividend should not be trusted. Because one cannot be sure that it will pay a dividend in future or not. The company should have a long history of stable and regular dividend payment.

See the history of the company for last decade or so. Analyze the trend of dividend yield. It should be part of your portfolio if it has given stable or rising dividend yield. Dividend history can be seen at the website of all the stock exchange in India where you can invest your money.

  1. Debt of the company

The company borrows money from market or bank for its expansion or other business needs. Many companies have huge borrowing on their books. This borrowed payment sometimes is very high and takes away a huge part of profits. If profits are decreased then it is not possible for the company to pay a dividend. It is in the interest of investors to avoid these companies.

A slight increase in interest rates will decrease/wipe out company’s profit. Even if the board of directors of the company wishes to give a dividend. They cannot give, because of the shortage of funds.

Not only in share market but also commodities trading companies can be considered on same lines. Commodity trading tips for beginners can be had from agents/brokers of commodity exchanges.

Conclusion

See to it that your portfolio is diversified across sectors. This reduces the risk, as some sector performs best and some perform worst, at a given period of time.

Must Read: How to earn regular second income from the stock market?

One should never over-exposure the investment in only one company and one sector only. Some sectors perform contradictory to each other. Like when share market is on high ROI path, gold is at low ROI path, and vice versa.

Plan for dividend income should be made during working years as it needs time to grow. Patience, research, and regular investment help you achieve your targets.

Dividend income is one of the best passive sources of income. It provides the investor with regular and steady cash flow when other sources of income are dried up. It can be a source of regular income during retired life. One can see forward to rich, wealthy and worry-free life.

Beginner’s guide for investment in Indian share market

There are things that beginners should do, and should not do in general while dealing in the share market

Beginners guide for investment in Indian share market

As with any financial instrument, share market also carries associated risk. This risk can be reduced if we take certain precautions.

Below given are certain general dos and don’ts while dealing with share market.

 

Must Read: How Do You Invest in Stocks for the First Time?

 

Things you should do

1.  Check if market intermediaries, like DP, broker, sub-broker, agents are registered with the exchanges. In India, all data can be found at SEBI official website. They are given the specific registration number.

2. Always give clear, to the point and straightforward instructions. To the intermediaries like your broker or sub-broker or depository participant or agent, as the case may be.

3. Always insist on your depository participant/ broker/sub-broker/agent to give you contract notes. Whatever type of transaction it may be. In case of any doubt, it is better to verify the genuineness on the exchange website.

4. Settle all the dues completely through normal banking channels with the market intermediaries. They should not be kept pending for unnecessary reasons. Who so ever end it may be.

5. Before placing a buy order with depository participant/broker/sub-broker/agent. Do check about the standing and credentials of the company in the marketplace. Credentials like management, fundamentals, and various recent announcements. And also disclosures made under various regulations, to SEBI from time to time. One can get most of the information on SEBI website, company’s website, business magazines, and financial newspapers.

6. Always adopt trading or investment strategies which are in the line of your risk tolerance capacity. You may be aware that all investments carry risk. A degree of risk does vary for different type investment instruments. It depends upon the strategy one adopts.

7. Always check, verify and confirm before registering with the intermediaries. With any depository participant/broker/sub-broker. Risk disclosure document is available with market intermediaries. Its content should be understood and read carefully. It forms a part of investor registration need.

8. Penny stocks sometimes display abrupt spurt in price. Or sometimes shows high activity suddenly, for no particular reason. Investors are cautioned about these types of stocks. They are high risk, and if positive, give high returns too.

9. Stock market goes up and down. Usually, in the Indian market, it is called bull or bear run. Though no one can guarantee returns. But taking a calculated risk, one can increase more probability of gain than loss.

 

Must Read: How To Perform Fundamental Analysis of Indian Shares?

 

Things you should NOT do

1. Do not deal with unregistered brokers/sub-brokers/agents. Most of the time, they only flee the customer. Often they wrap up their business all of a sudden, leaving no traces.

2. Do not buy/sell on basis of rumors in the market. Sometimes companies just create rumors to increase their share price or net worth. It is a frequent phenomenon, just to create rumors, and be in limelight.

3. Do not go with unregistered intermediaries. They promise huge and guaranteed returns, which are practically impossible.

4. Many companies show government approvals/registration which may be for some other purpose. It may not be for securities that you are buying. That is, purpose and use may both be different.

5. Never give custody of your signed blank demat transaction slip book in hands of any intermediary.

6. Do not be carried away by the financial figures shown in the advertisement. They may be deceiving. Try reading between lines to understand the true worth of the company.

7. Do not blindly follow the investment gurus. Or those who have profited in past. Because earnings may not depend on past performance. Though, in some cases, they may repeat their past performance or even excel it.

 

Must Read: How to earn regular second income from stock market?

 

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