Three Penny Stock Myths

MYTH NO 3: STOCKS THAT GIVE HIGH DIVIDENDS ARE THE BEST BET

This comes from the notion that regular dividends are extra in-come in the shareholder’s hand. This may not always be true. While a company may be making decent payouts every year, the share price appreciation may not be comparatively high. Before investing in companies paying high dividends, it’s important to analyse if the company is reinvesting enough profit to grow its earnings consistently.

Says Brics Securities’ research VP Sonam Udasi: “It’s not dividend that matters but the yield. For eg, a company may pay a 100% or even a 300% dividend on a stock with face value of Rs 10. So, the investor may receive Rs 10 orRs 30 per share when the stock may be currently trading at Rs 800 or Rs 1000. This would translate into an yield of 1% or 3% only.

Also, such companies may not necessarily be reinvesting their earnings in the business to generate future earnings and so there may be no stock movement. The dividend may be high but the EPS and growth per se may be constant.”

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