Wednesday, August 29, 2012

Dividend- Should we pay for it?

I have posted this ridiculous question because I saw a fair bit of illogical behaviors in this strange market. For example, when NCB announced in April 26 that it proposed a dividend of 56 sen, the share price rose nearly RM1.00. After the payout, the share price dropped back to where it was before the dividend announcement. See the chart below.

I always tell my client not to chase after a stock for dividend. It is not that I do not believe in buying good dividend stocks, but one should not get into a stock which had risen substantially just to get its dividend. Those who bought into NCB at RM4.60 to get the dividend of 56 sen, would find it very painful to see the stick dropped back to RM3.90- a drop of 70 sen. Paying 70 sen upfront for a dividend of 56 sen sounds like a bad trade to me!

Chart: NCB's daily chart as at Aug 28, 2012 (Source: Tradesignum)

The better approach is to identify the high dividend paying stocks and go to the Bursa website to identify when the stock's next dividend payout will be. For example, you can identify the dividend payout date for NCB by going to this web page (here). Once you have identified the approximate announcement date (normally, coinciding with the announcement of quarterly results), then you can track this stock & buy it during correction or on weakness as the relevant date approaches.


Kevin Soon said...

Dividends are irrelevant, because you are basically getting back your capital less tax. E.g. if u buy a stock at RM1.00, then after a dividend payout of RM0.10, the price will be readjusted to RM0.90.

So you get a dividend of RM0.10 per share, but it is offset by the loss in market value. We are not better off after the dividend.

Unknown said...

dividend is relevant for long term investor ... those who jump it after dividend is announced are those ignorant amateur traders ...

Kevin Soon said...

Hi Unknown,

The concept is still the same whether is long term or short term.

If you get dividend during the long term, it means your stock also are adjusted downwards during that long term.

Which is better? A stock worth RM1.00, or a stock that worth RM0.50 after giving dividend of RM0.50 over the long term?

Mat Cendana said...

I've been wondering about this kind of responses too whenever a company announces dividends. Sometimes the dividends are just a few sen and it is absurd for investors to still buy them after the price had gone up beyond that dividend.

It would only be sensible if one is in it for the long term, i.e. if he's going to hold onto the counter for future similar dividends. But this is only valid if the counter has a track record of paying regular dividends. With some companies, it's just a one off.

I think it pays to do some homework first on dividend-paying companies and see when they tend to announce. If the price is low enough, that might be a good price to buy and wait... and sell to those who are so eager for the dividends. Often, the capital gains one makes is significantly more than the dividend `lost'.