Capital gain versus dividend – which one is better?

Capital gain versus dividend – which one is better?
Personal Investing - By Ooi Kok Hwa

DESPITE the high FTSE Bursa Malaysia KL Composite Index levels, a lot of investors have been complaining about not getting the desired returns by investing in the stock market.

This is because they are holding shares in companies that have poor fundamentals, and the majority of the sestocks are still selling at very cheap prices.

As a result, most investors not only incur capital losses due to low prices but al so not get any dividends from these companies. In this article, we will look into the importance of capital gain versus dividend.

When we look at the performance of listed companies, we find that the majority of companies t hat have performed well in terms of stock prices are companies that pay good dividends; for example Nestle (M) Bhd, Dutch Lady Milk Industries Bhd, Public Bank Bhd etc.

Most investors are aware of these stocks that pay good dividends. However, some would not consider buying into these stocks because to them, the stock prices are too high or too expensive.

Instead, some investors prefer to take the chance and buy penny stocks, which they think are cheap and have higher probabilities of getting huge capital gains.

Unfortunately, most of them find that after a few years, they are still not receiving any dividends from these stocks, while the stock prices are still far from their targets, some of them even below their purchase prices.

Investors wh o buy stocks that pay good dividend s need to have the mindset and habit of holding stocks for long-term.

Normally, people who prefer to invest in di vidend-paying stocks will not speculate on these stocks but keep them for the long-term as the companies have been rewarding them with good dividend payments over the years.

Companies that pay good and consistent dividends also reflect the sharing attitude of the companies’ owners.

There have been instances wher eby some listed compan ies, when in need of funds, would raise the money from investors through various types of capital calls.

However, when the companies start to accumul ate excess cash, they do not reward investors with special dividend payments.

Instead, if their stock prices were selling below the net cash per share of the companies, they woul d consider taking the companies private so that they can have direct access to the cash.

Hoping for capital gains Many companies refuse to pay dividend s to investors because they claim they need to retain profits for future expansion.

Even though there are cases where future expansions turn ou t to be successful and generate good profits to the companies, there are als o cases where expansion projects fail.

We notice that st ock prices for companies that either pay very low or no dividends would fluctuate according to t he overall sentiment of the stock market, whereas stock prices for companies that pay good dividends tend to be relatively more stable.

Most investors know the need to buy low and sell high to make money. However, most do not know when to sell their stocks. We cannot sell a stock just because we have bought it cheap.

According to Benjamin Graham, we should only sell a stock when the fundamentals of the company deteriorates.

We should not sell the stock if the stock price is temporarily above its intrinsic value as it is not easy to identify a company with good quality management.

Besides, this type of company usually pays stable and growing dividends as it usually has a fixed dividend payout policy to reward investors.

However, most investors may sell their stocks too early. Companies that are unable to pay dividends are usually companies that incurhigh capital expenditure for future expansion.

These companies not only do not have any excess cash to pay dividends, they also have high gearing and need to retain all profits for expansion. Hence, investors who buy these stocks will have to bear higher risks.

In short, it is safer to buy into companies that p ay good dividends.

As mentioned earlier, companies that pay good dividends reflect the attitude of the companies’ owners, whether they are willing to share profits with minority shareholders.

This is important as we have growing cases of companies with issues on corporate governance.

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