#BQMutualFundShow: Why Dividends May Not Be The Best Option For Regular Cash Flow
Investors should stay away from dividend plans for at least the initial years, says Vijay Mantri.
Investors should stay away from dividend plans for at least the initial years after they start investing, said mutual fund expert VijaI Mantri. These plans should, in any case, not be used by those looking for regular cash flows. Doing so would mean taking money put of an asset category which is a growth asset and creates wealth in the long term. This is how investors end up significantly destroying the wealth offered by a dividend plan, Mantri said on BloombergQuint’s weekly series, The Mutual Fund Show.
Here are edited excerpts from the interview.
What kind of investors should choose what kind of plans and how does the difference come about? Why is there such a large difference?
The reason is for the difference is that you didn’t allow the power of compounding to work in a dividend plan because you periodically took money out. So an asset category which delivers 20 percent CAGR over a 22-23 year period, you continuously took money out of that plan. That’s the reason for differences. If you analyse correctly, the difference between Rs 2.6 crore and Rs 13 crore is close to Rs 9.5 crore. This Rs 9.5 crore is return on Rs 1.76 crore. So, it is a return on a return. So it’s the return on the dividend alone which you have taken out. If you don’t need regular cash flow, by dipping into an asset category which is essentially a growth asset and which creates wealth in the long term, investors end up significantly destroy the wealth offered by a dividend plan.
My advice is if you have a regular cash flow need, there are some alternatives available. More importantly, you need to analyse the situation and figure out that, if you continue to take money out from an asset category which delivered much better returns than inflation, then you are significantly compromising your wealth creation opportunities.
Should someone who doesn’t have an alternate source of income go all in into a dividend plan or should he go in for a part dividend, part growth plan?
Let’s address the feel good factor first. I have invested in properties so I get regular rental income. I have invested in fixed deposits so I get regular interest. I have invested in tax free bonds so I get regular income and I feel very nice about it. That is the logic people apply.
But if you look at investing in real estate, the rental yield in real estate is 1-2 percent. Here you end up taking 10-12 percent. If I put a comparison between real estate and dividend in a balanced plan, if you take 2-3 percent yield, that is fine but you are taking 10-12 percent. So, for every 1000 square feet of a flat, you are taking away 50 square feet every year. The prices may go up but the number for square feet area is diminishing. That’s one way to look at it.
The second way is, even if you want regular income, my submission to investors is don’t look at this asset category in the initial years. The comparison between a growth plan and a dividend plan is like planting a tree or a plant. Suppose you have a plant, then you look at fruit or vegetable bearing assets in a couple of months. But, if you are planting a tree, then you are not looking at growth for 1-2 years but for a longer period of time. But when the tree grows and starts bearing fruits then the tree would outlast the life of an investor. So when you want to invest in a balance fund, invest in it and wait for a few years and then start taking money out. That strategy works out much better for an investor then going for dividend from day 1.
Is the frequency or recurrence of dividend payout as consistent as the dividend payout would be in a fixed deposit?
Not at all. If you have given a property on rent, then you expect monthly rental, bonds have fixed interest paying dates. Dividend doesn’t have that kind of frequency. Declaration of dividend depends on the fund house. A couple of years ago, fund houses would declare dividend on an annual basis which was not very consistent. So, you can’t depend on dividend as a regular cash flow to meet your expenses. So, I don’t think the regular investment strategy through a dividend plan is such a wonderful thing. So, I don’t buy that argument. It is not in your hands. The fund house will declare a dividend depending on the earnings they have. Right now, they are seeing consistency for a couple of years because the market has been rising but let the market come down and we need to see how the consistent the dividend declaration will be.
Have you analysed the difference between the dividend option of a mutual fund versus a fixed deposit?
I will use a debt product – fixed deposits or debt mutual funds. If the funding requirement is for 3-5 years then you need to invest in those kinds of products. If your funding requirement starts immediately, then balanced fund may not be the best strategy in all market conditions. It may work in a rising market because then you are booking a profit. But in the falling market, the NAV is falling and you are taking money out. You don’t allow the power of compounding and growth to kick in and grow your wealth. Only in a rising market, perhaps, the monthly dividend strategy will work. But in all other market conditions, the regular strategy in the dividend option will not work. It is better to go for a debt option in the initial years and then look at taking money out of dividend after a few years.
