I did not get my dividends

A recent tweet on my timeline highlighted this conversation between an investor and a mutual fund representative

Investor: The XYZ scheme has declared a dividend. But I did not receive any dividends?

Rep: Let me check. …Sir, this is because you are invested in the growth option.

Investor: Oh, so how do I get the dividends?

Rep: (Head spins)

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My father holds shares of a large FMCG MNC. One day, I saw him smiling ear to ear.

“What is it?” I was curious.

He held the cheque in front of his face, details facing towards me. It was for a dividend declared by the company.

I didn’t want to spoil his happiness but I mentioned to him, “this dividend is nothing compared to the value of your investment. Your stock value has tripled in the last 6 years.” He simply ignored the statement. 

I continued to reason, “your dividend yield is a mere 0.33%.” (Dividend yield is dividend amount / Market value of investment)

But the gyaan fell on deaf ears. He was happy in the moment with his dividend.

What is this fascination with dividends?

I guess I somewhat understand the reason now.

A bird in hand is worth two in the bush.

That’s right. Stock prices can go up and down but a dividend is neat cash or I must say, bird in hand.

The dividend reflects certainty, the stock price growth is uncertain, dependent on the market moods.

The dividend is a reward of the effort, an acknowledgement of the success of your investment decision.   

If religion is the opium of the masses, dividend is the opium of the investors.

The Power of Dividends

You invest in the equity of a company by buying its shares. This makes you a shareholder in that company.

When the business of the company does well and it generates profits and cash flow, it shares the profits/gains with you, its shareholders (after paying all its expenses and other taxes). This share of profits/gains is called dividend.

Read more: Equity Investing: Let’s get this straight

Several companies have built a reputation by declaring regular, high dividends. This makes them attractive to investors who are looking to earn regular cash flows from their investments. In fact, they might even command a higher valuation for this reason.

“Does it pay dividend?” is a question asked by most investors. 

The media headlines pay great attention to dividends. Sample these:

“Top 10 companies that pay more than 25% dividend”

“Consider quality dividend-yielding stocks”

“Best dividend paying stocks in India”

It is quite clear that dividends are used as a magnet for attracting investors.

Unfortunately, there are some people out there who take advantage of your love for dividends. They are using it as a gimmick to make their products look more attractive. The more unfortunate part, you are falling for it too. 

When I see investor portfolios laden with equity funds with “dividend option”, I know what is at work.

Dividend as a sales gimmick

There are mutual funds that cater exclusively to this mindset calling themselves “Dividend Yield Funds”. These funds have large investments which means that they are able to capture investor interest by using the term ‘dividends‘.

Here are a few:

• UTI Dividend Yield Fund – AUM of Rs.2,758 crores
• Birla SunLife Dividend Yield Plus Fund – AUM of Rs. 1,074 crores
• Tata Dividend Yield Fund – AUM of Rs. 317.5 crores

It is an irony though that such dividend yield funds also offer a growth option.

Then there are equity funds or hybrid equity schemes (with some portion invested in debt too) sold with the promise of a “Monthly Dividend” option and sadly investors are lapping them up as well.

Lot of retirees are committing their hard earned money to these funds in the hope of a regular monthly income.

If you understand how equity works (which means you understand how business works), you would never expect a monthly dividend, would you?

An equity scheme that declares a monthly dividend is at best a Ponzi scheme. It attracts new money from gullible investors to pay dividends to the existing gullible investors. In the process, it earns a hefty fund management fee, paid from the investors’ money.

It would be good to remember that dividends are also paid from your own investments.

Let’s look at one more aspect about dividends – taxation.

Here’s a key attribute of one of the funds from a well-known fund house with the same pitch. It talks about its dividend trigger option.

A disciplined way of booking profits by the investor without any tax liability using Dividend trigger facility.

Tax free dividends! Who wouldn’t want them?

Yes, let’s acknowledge that when you receive dividends either from stocks or from mutual funds, they are tax-free, in your hands.

Please note the last 3 words. The dividends are tax-free in your hands only.

When companies pay dividends, they have to pay dividend distribution tax at 15% plus surcharge and cess. So actually you receive dividends on which taxes are paid by the company and hence you don’t need to pay additional tax. 

In case of mutual funds, a fund receives dividends on its investments. The same logic applies to them. And hence, it was only sensible to not apply additional tax on dividends distributed by equity mutual funds.

But of course, that didn’t prevent its misuse.

Read more: Growth or Dividend option

Why not make your own dividends?

Quantum Long Term Equity Fund has never declared a dividend.

Parag Parikh Long Term Value Fund doesn’t even have a dividend option in its only fund scheme.

I appreciate their thought on this matter. If you need the money, make your own dividends. Just sell some units and get the cash.

Why are you dependent on the fund house to declare a dividend?

Investor: So how do I get the dividends?

Rep: Sir,  just sell some units of your fund.

Investor: That’s brilliant. Thanks for the information.

It is indeed sad that as an investor you do not wish to understand how your investments work. There seems to be just once concern holding your minds sway – the dividend.

Dividends certainly have a role but it needs to be understood and used appropriately in your investments.  Beware of the gimmicks. You will reap better dividends.