07 Jun 2019
Is it wrong to think of buying a dividend paying stock and ignore the paper gain or loss for long term?
Is this line of thinking wrong:
Buy a dividend paying stock (e.g DBS,SGX) and get X% of dividend yield return/ yr but ignore the paper gain/loss since i m looking for long term and don think i will sell soon. So essential its like parking your money in a long term 'bond'/perpetual and getting coupon of X%/yr.
Just to add another perspective to your question! When you mentioned "
So essential its like parking your money in a long term 'bond'/perpetual and getting coupon of X%/yr.", you are right in the sense if company has constant and sustainable dividend pay-out ratio.
However, one fundamental difference between bonds and equities is that for equity owners, you are entitled to the residual earnings of the company in the form of dividend payments (which also means that you may get none if the company did not do well financially). On the other hand, bond holders are entitled to fixed income in the form of interest payments.
On this note, the returns for bonds is irregardless of the stock price but it is erraneous to assume that dividend yield is tantamount to "a long term 'bond'/perpetual and getting coupon of X%/yr."
Hello! Here’s a brief response to your question.
First, it depends on whether the company can even sustain giving dividends in the long term, and what is the dividend pay-out policy of the company. Has the company been paying dividends for a long time, or has it recently been paying dividends only? Also, pay attention to a company’s cashflow. If the company does not have enough cash on hand for its operating requirements, then it may stop paying dividends after a while so that it can fund its operations. You can look at a company’s cashflow by looking at the Cashflow Statement found it its annual or quarterly financial reports.
Second, do look at a company’s share price as well! If you can sell the share and make a healthy capital gain (the gain from selling a share higher than when you bought it), then you might consider this alternative. If you would prefer a portfolio that pays more dividends, then the gains from this sale could help you to buy more shares with a steady dividend pay-out too.
Third, what do analysts and other investors say about this company’s share? Do the others see it as an investment for the share’s dividend yield, or for selling the shares? Seeing what other investors think may help you frame your thought process also.
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For me, I'll still monitor the counter here and there to see if it can be sold for a good profit for...
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