This is one of the very common questions generally asked by many investors whether they should invest for stocks with good dividend returns or which have high capital appreciation? If you want to find an exact answer for the same, you will end up in disguise. But the discussion will help you in building your investment strategy. Through the article you will have a clear picture on how your demands and requirements will be fulfilled.
Let us first understand how things work and then build various strategies. Prior to capital appreciation or dividend, your investment strategy should be based on following aspects:
- What is the growth rate of the business and their future aspects?
- How the management is managing the funds i.e. debt, equity, profits and any other source?
- Are there long term growth plans available or the company works only on short term growth?
- How the benefits are provided to the different stakeholders like benefits for all employees and not only for top management etc? This is important as the stakeholders effects a lot on the share prices.
Let us see how things take place in different scenarios:
When there is dividend distribution:
The business is performing good and return profits as dividends among its shareholders. So, the investor will get the returns through dividends. But some part of profit has to be reinvested for the growth of the company. Also, the investors expects a growing value of dividend. So, if company is providing a fixed percentage of profit as dividend every year, the investor will get increasing amount of dividend according to the growth rate of company. And with the dividend distribution will also lead to increase in stock price. Here, the stock price will increase at a slower rate due to lesser reinvestment. But overall investor will gain with the growth of the company.
When dividend is unevenly distributed or major amount is reinvested:
The business is growing at a fast pace and the profits thus gained are mostly reinvested for future plans. So, the dividends may be distributed if available but there is no surety. But with the high growth rate of business stock price will also grow at a fast pace. So, the investor will get the returns through capital appreciation.
So in both the cases, if the company is performing well, the investor will get the return either through increase in stock price (capital appreciation) or dividends. So, the investor should more focus on the company and its strategies.
Then why do we have to think about dividend and capital appreciation. This is because it gives the clear picture about the company’s strategies and help you to match with your risk appetite. The company which distributes large amount of profit to investors have a comparatively slower growth rate. This is a kind of conservative approach. So, the risk involved is less and accordingly lesser return is expected. Here, more money will be available with the investors.
Whereas the investor with high risk appetite will prefer capital appreciation. The major reinvestment of the profits shows that the growth rate will also be high. But in the recent few time, it has been seen that the stock price falls tremendously if the stock market crashes. And in such a situation, the investor have to face very high losses. So due to the fluctuating market, investors are noticed to be inclined towards the stocks paying high dividends. Now based upon you risk appetite and expected returns, you can build your investment strategies.