Question

Why are investors in the recent past hungry for dividend yielding stocks?

Answer 1

It is mostly seen that the demand for dividend stocks rises when interest rate falls. This is because CONSERVATIVE investors see it as a less risky, reliable bond like stream of income and considers it attractive especially when bond yields are low. Also certain conventional media channels discuss dividends as a separate source of income. So, dividend investors are hooked on to the concept of "reliable income source", but this idea is mostly PERCEIVED.

We need to understand the mechanism of dividends, it is the shift of money from share price to the dividend being paid. This means that dividend payout leads to equivalent decline in share price.

For example, I as an investor have 100 shares of company X priced at 1$ , this company X pays 2% dividend annually. Considering that its share price remains same, I will recieve 2$ for my 100 shares and the share price will drop to 0.98$.

Considering a non dividend paying company Y, 100 shares whose share price remains at 1$. If I want income I can very well sell 2 shares and collect 2$. In both the situations i will be left with 98$ worth of shares and 2$ of cash.

So, experts suggest that investors need to focus on total returns and not just look at dividend income. Total returns include stock returns(from appreciation of stock value) and dividends, both being EQUALLY important contributors to overall return. But dividend investors tend to ignore this fact, and focus more on just dividends. For example, it is a common tendency to hold dividend paying stocks for a longer period of time(i.e not sell it) as compared to non dividend paying stocks, as it is perceived to give a steady flow of income, but this amount is generally very low. This money instead of being parked here, could be better utilized by investing in a non dividend paying stock giving larger capital gains.

Conclusion, conservative investors perceive that dividend yielding stocks are less risky and they offer a steady source of income. But this may not always be true as we need to look at both, capital gains and dividends, while choosing our investment strategy.

Hope this helps.