What you must not forget to do when you get your dividend!

The eight wonder of the world is compound interest . It is the one mathematical formula applied to real life that can make you immensely wealthy.

This is exactly the reason why we buy mutual funds which are growth oriented, because at  15% growth per annum , your initial investment doubles in 5 yrs . It becomes 4 times in 10 and 8 times in 15!

Now how do we really consider this in our stocks which give us dividend and fixed deposits which give us interest post maturity?

The basic point of compound interest is that the growth is re invested back in the business. Without re investment there is no compounding factor.

With that understanding we need to take action on our dividends and our interest rates of our fixed deposits.

We HAVE to invest it back.  Buy new shares in the company with your dividend amount.

It is as simple as that. 

However what usually happens is that the money comes into your account, you see a credit in your account.. think how small it is.. ignore it and continue with your life.

When you do that... you have missed the opportunity of compounding.

In case of fixed deposit.. the money with principal and interest comes back into your account and most likely you keep the interest and re invest the principal back in... money not really needed but spent or left at 3.5% per annum returns.

So make note of this rule.. its a must

If you get dividends.. re invest it immediately into new shares of the same company.

If you get interest from your fd.. re invest the principal and interest into a new fd!

Its simplefinancialsense

Dividend yields in a high interest rate scenario

Usually a good strategy is to go for a portfolio which has got companies which give good divendends year on year ( yoy). Dividends are tax free and hence provide a good source of income apart from capital gains

Usually divendend range around 1-3% yields. When a company annouces divedends it is on the basis of the book value of the share . The book value can be rs 1 while the share price is rs 15.

The dividend yield is calculated on the basis of what the market value of the share is.

The table above is an excerpt from the magazine moneytoday which also talked about dividend paying companies.

In a high interest rate scenario, companies want to conserve cash,hence they reduce the dividend that they pay out. Hence if you look closely, a lot of the companies have reduced their payouts in the recent past.

However , there are companies , whose growth is always going to be slow while they generate a lot of cash, for them the best strategy is to pay out a higher dividend and keep their investors hooked on.

Look for such companies which pay a high dividend... They are good bets in such times.

Happy investing