Question

Mr. Smith bought shares in Bank of Montreal many years ago. He is considering selling them because they've gone up in value a fair bit. However, they really enjoy the dividend income that they receive from the shares? What is the best way in this situation ?

Answer 1

Any investor shall look at their investment from two different perspective – Returns on the Investment and Value addition of the investment;

If the Company doesn’t make any dividends and in turn retain the amount for further use of such amount towards reinvestment in to its operations or for paying off debt burden, this shall increase the value of the company in long term and helps in company to grow in more organic way.

If at all the company has the habit of paying dividends, sustainability/consistency of these dividends is the factor which is expected by the shareholders from the company. The company also has to be in a position to forecast in performance and hence need to calculate to assess on the dividend payouts; Interim dividend concept is introduced for such purpose to ensure sustainability of the dividends and for ease of assessing and further to ensure shareholders confidence and support for the company.

The investors shall have two way approaches. Some investors look at equity only for the returns, while some investors look for the value addition of their investment and not any frequent returns. As said, there shall be some investors for whom dividends serve as a popular source of investment income.

In this case, the shares are delivering the income interms of Dividends and also the value of the investment has gone up; If the strategy of the investor is to enjoy the benefits of the investment, these shares should not be sold, as the same are delivering the income as well as value addition.