Question

1. How important do you think dividends really are? Finance theory says they are essentially irrelevant and that investors can take returns in capital gains or cash dividends.

2. If you were the fund manager of a firm that handles millions of dollars of your clients money, how would you hedge your bullish/long stock positions during a pandemic like the one we are going through right now?

Answer 1

1. Dividend payments are critical to an investor because it provides a stable income stream that help to improve investment returns. Dividends are a share of company's profit that are paid to shareholders.

In general slower growing, companies pay dividend while faster growing companies would rather reinvest the money towards growth as their rate of return on reinvestment is high.

Dividend payments are preferred by investors who wants to make a constant rate of return from the market.

It is seen as a sign of a company which is making constant amount of profit and paying out dividend so it is very important in terms of getting preferred by different long term investors.

I personally think that Dividend are relevant as it is always good to realise a uniform small profit as unrealised capital gains can be wiped away in adverse makets. It helps in stocks being preferred by long term investors and it has Lesser of tax consequences than capital gains.

2.If I would have been a fund manager, I would have hedged my bullish position with VIX options which rises significantly as the volatility hits the stock markets.

I would have also hedged my portfolio with selling index calls and buying index puts .It would have protected my portfolio against any significant downside.

I would have also hedged my position by buying the put options of the stocks I'm holding in my portfolio .It could also be hedged through selling the Index futures .