Vedanta controlled Cairn India has declared its maiden dividend of Rs 5 per share (of face value Rs 10). In April 2012, Cairn India had approved its dividend policy, which aimed at payout of around 20% of its annual consolidated net profits.
Regular readers would agree that we have been openly advocating dividend investing for building long term wealth (Why?). So, though Cairn India has declared its very first dividend, is it a good candidate for dividend investing?
We think it is. Our arguments:
While selecting stocks to hold for long term, we had chosen Cairn for its growth potential. The company is still in its initial stages and is looking to ramp up its production. It has investment plans of $600 million over the next two years in Rajasthan exploration blocks, which will increase output from those oilfields. Any ramp up would eventually lead to increase in revenues and profits. This was our initial logic for putting Cairn in our long term Dead Monk’s Portfolio; i.e. we were looking at Cairn for its growth.
Cairn has now declared that it would pay 20% of its annual profits as dividends. When we compare this to its peer ONGC, we find that on an average, ONGC’s dividend payout is around 33%. This is more than what Cairn plans to pay. But ONGC’s oil fields are mature and scope for production increase from existing oil fields is low. Hence, with lower planned investments in existing fields, ONGC shares ‘more’ profits with its shareholders. On the other hand, Cairn India is a growing company. It is keeping more funds for investment in increasing its production. This approach is totally in line with a normal growth stock. Lower dividend payouts and higher investment in business. While deciding the quantum of payout (20%), the company has kept in mind the twin objectives of stable dividend payout and investment for growth.
So will Cairn continue paying dividends? At rates atleast 20% of net profits? Common sense says Yes… Otherwise it would hurt investor’s sentiments if company decides to change its dividend policy (reduce) or refrained from giving any dividend in later years.
With ONGC, a mature oil company commanding a multiple of x9.2 and a growing company like Cairn commanding x6.0, it appeals to common sense to start buying Cairn India for long term.
Generally, oil exploration companies world over are cash rich and have generous dividend payout policies. So, Cairn India, growing at present, would (most probably) increase its dividend payout upwards from 20% at present, once it business stabilizes and oilfields mature.
All in all, Cairn India seems a potentially good stock to hold for dividend as well as growth potential. Please note that our views may be biased as we hold both these companies in our personal long term portfolios.
This post is based on OSV’s post by Daniel Sparks. Daniel was kind enough to permit use of his idea for this post. Thanks Daniel 🙂
So how often do you check your stock portfolio? We have personally seen people checking stocks in their portfolio every few minutes! But we are not going to judge them. They may be short term traders who need to do it as they are there to make quick profits, or they may be ones who get a high everytime their stock moves up a bit (even though they will not trade regularly). We will rather talk about long term investors. Investors who are willing to stay put in markets for years and if possible, decades.
“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.”
Greats like Benjamin Graham, Warren Buffett & many other veteran long-term investors pay very little attention to daily prices. They buy stocks of great companies and pay more attention to what the company is doing and how the economy is affecting the company’s operations.
But we are not Warren Buffett, and therefore we need to understand that we cannot operate like him. We must accept the reality, that we do and will check our stocks as much as possible. 🙂
But what we all can TRY is that we can reduce are frequency of checking stocks. How do we do it? At first, we need to segregate them in following categories –
Large Caps are industry leaders, have sustainable businesses and provide solidity to your portfolio. They are generally among the top 100 companies by market cap. They typically don’t need to be checked very often because you can rely on their reliable cash flows & good managements. So if you are ready to stay invested for years, it does not make much sense to check them on a quarterly basis. Such companies don’t change much on quarter to quarter basis. An investor should rather focus on checking the annual reports (and letter from management). In addition to checking such stocks on annual basis, one should also set some kind of alerts to get notified in case prices move more than 5% in a day on either side (sites like moneycontrol.com allow such service). This helps staying in loop in case of some major news or development, which demands an investor’s attention.
Being part of mature industries, dividend stocks are generally not very volatile. They are present in portfolio primarily for their dividends and less for capital appreciation. Like large caps, these stocks provide a lot of solidity to portfolio. Such companies should be looked at on a half yearly basis to see if they are performing in expected manner, whether dividends being paid are increasing / decreasing / remain same. Alerts can be set up in manner as specified for large caps.
Mid caps are companies which are outside the top 100 companies by market cap and are more volatile to news or result declarations. Their prices move very quickly and therefore it is important not to be overwhelmed by any drastic price movements. The important point is to understand the difference between meaningful news and short term jitters and not fall victim to acting on emotions. Such companies should be checked on quarterly basis to see if the company is performing as expected or otherwise. Alerts can be set at (+/-) 7%.
These are companies that are growing at fast pace and are part of rising industries. Such stocks do not offer dividends (generally) and hence are of very volatile nature. Such stocks should be checked every quarter to see whether growth story is intact or not. Alerts can be set at more liberal (+/-) 7%.
One of the advantages of setting alerts is that it allows a long term investor to be ready to buy more, in case prices fall a lot but reason for buying the stock initially still remains valid.
We must understand that the most important decision is not how often one checks stock prices, but what one does with that information. One should act on changes in the economy or other conditions that affect the company. Reacting purely on price changes is not a wise thing to do. Daniel Kehneman said:
“Investors should reduce the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are also less prone to useless churning of your portfolio if you don’t know how every stock in it is doing every day (or every week or even every month). A commitment not to change ones position for several periods improves financial performance.”
A study found that a goalkeeper who stands in the middle — the stock market equivalent of doing nothing — has better success than one who tries to guess which way a free kick will come. It was found that goalkeepers jumped to the left or the right significantly more than was useful in preventing goals. In fact, they jumped an overwhelming 94 percent of the time – meaning they stayed in the middle only 6 percent of the time. In comparison, the shot went towards the centre 29 percent of the time. Goalkeepers, it seems, could achieve more by doing less.
Similarly in managing stocks in your portfolio, it is often best to stay in the centre and do nothing. Sitting put on your index funds & dividend stocks, not trying to find the bottom & most importantly, not panicking, serves an investor better than trying to guess and time the markets.
Experts (though you should not believe them blindly) agree that investors will be better off resisting the temptation to make changes to their long-term investments simply because of short-term stock market movements. If your personal circumstances and financial goals haven’t changed, and you are still interested in being invested for the long term, then it is probably appropriate to ‘do nothing’.
To test the benefits of doing nothing in Indian markets, we analyzed the data for last 20 years. We specifically looked at 5 & 10 year rolling returns (CAGR) of Sensex (index) to understand whether it made sense to invest once and sit through years doing nothing?
The results are shown in graphs below –
Click to enlarge
Returns on rolling 5 Years
Average 5 years returns have been a good 11.8% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 5 years, your money would have grown at a rate of 11.8% every year (Doubling in just over 6 years).
Click to enalrge
Returns on rolling 10 Years
Average 10 years returns have been a good 10.9% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 10 years, your money would have grown at a rate of 10.9% every year (Doubling in just over 6.5 years).
Now these two figures of 11.8% & 10.9% are not earth shattering, but if maintained for decades, they have the potential to make investor following do-nothing approach, super rich.
Summarizing our finding in table (below), we found some interesting things –
In all we had 201 Five-Year Periods. Of these returns earned in excess of 10% were 91 of those periods. i.e. 45%
The buy and hold strategy (for 5 Years) beat long term average of 11.8% a good 37% of the time.
For Ten Year Periods, we had a fewer 141 periods. Returns earned in excess of the long term average of 10.9% were a brilliant 59% of the time. i.e. If you stayed invested for 10 years and did nothing, chances of beating the long term average were a high 59%.
And you thought that buying and holding did not work! 🙂
So does it mean that Doing-Nothing works? We would say that it does, but only if you are ready to follow it for long term. And long term means years (decades) and not months. Frankly, there doesn’t seem much point in overanalyzing, overthinking, and exhausting oneself by trading in the short term. We must understand that it is TIME and NOT TIMING that is the key to successful investing.