Many investors focus on dividends when deciding where to invest their money. The main reason for doing so is to earn a regular dividend income, aside of the capital gains. Firms, especially established ones, have a practice of periodically returning capital to their investors in the form of share dividend payouts.
Theoretically, distributing dividends shouldn’t impact the overall returns as the amount paid out in dividends is accounted for by reducing the cash balances (and hence the value) of the company – which in turn is reflected in a lower stock price. However, it has been observed that share prices don’t tend decline by the dividend amount in practice. This happens because announcing & distributing dividends is seen as a very positive sign of the firm’s health by the broader market.
Each time a company announces a dividend, it signals to the market that it’s doing well – that they have enough cash to not only continue/expand their operations but to also return some money back to their investors. It’s seen as a sign of a healthy & responsible business.
In fact, the share price can sometimes even gain on the back of the dividend announcement even though theoretically it should’ve decreased – this usually happens when either the market isn’t expecting any dividends or if the dividend payout ends up being higher than what the market was anticipating. Such is the power of sending a positive signal!
There are many factors that people (and in turn the broader market) consider when determining the strength of this signal. One such is how much the dividend payout has changed compared to previous years. If it’s reduced, this is seen as a major negative signal since this usually happens when there are some underlying issues with the firm. If the dividend amount stays the same, it’s a good sign but also one that’s expected and perhaps already priced-in.
On the other hand if the firm increases its dividend payout, this is taken as a very positive sign by the market – the thinking is that the company is growing & doing well enough to not only pay dividends but also increase it! As such, when it comes to investing to earn share dividend income, identifying companies that are consistently increasing their dividend payout is a rewarding strategy.
Which is why we created the Dividend Aristocrats smallcase – a portfolio of 8-10 stocks that have increased their dividend payouts consecutively for the last 10 years. Not only does the research team identify stocks that meet this criteria like HDFC Bank, ITC, and Bajaj Finance – they also create a portfolio where every stock is weighted based on various fundamental factors, including their current dividend payout. Moreover, this portfolio is rebalanced every year to ensure only companies that meet the above dividend payout standards remain in the smallcase.
By investing in the Dividend Aristocrats smallcase, you aren’t just investing for dividend income – you are actually investing in a portfolio of diverse companies that are not only growing consistently & are operationally stable, but also sending positive signals to the market.