dividend investing

There are a lot people who think that investing for dividends is great. They work hard, very hard, to accumulate the investment corpus enough for them to live on dividends for rest of their life. 

There’re at least two problems with it. The first is that dividends are just one of the components of the total return. The other, often the major portion, is capital gains. 

Generally, dividend paying firms do not have much growth left in them; and high-growth firms generally do not pay out any dividends because all internal profits are ploughed back into the business to generate growth. For high growth firms, increase in market price reflects capital gains which will be quite high too.

So this obsession with dividends is laughable. More so because even for people who need cash, they can sell some portion of their portfolio as capital gains. There may be times when market price may not be the best to sell, but investing in stocks is that game. For fixed income, it’s better to stick to fixed currency investments.

The second is that considering dividend yield based on cost (past purchases) isn't a great idea. It's the opportunity cost on current market price what matters. 

There’s another problem too. Somehow these people like to grind all their life only to live on a teeny portion of their wealth; dividends. They’ll be glad to leave their wealth for someone else to enjoy. Freakish, perverse, or masochist, how do we define them?

Try telling this to dividend buyers...

the twenty percent return strategy

The (so-called) value investors have dug a hole for themselves when they talk about margin of safety and bash (higher) discount rate in dealing with risk in cash flows.

They like to discount cash flows at 10%, bring down the present value by 40% as margin of safety, and then expect the stock to give them 20% return.

In fact, I have seen some of them discount earnings, rather than cash flows.

They also have the habit of beating round the bush so much. Can't put across their point without some bullshitting. 

real property, and tax

Here's the story. There was this ancestral land lingering for a long time. The house that was on the land was dilapidated. So the time was apt to do something about it. The family, finally after a long, long pause, decided to do something. 

They contacted a real estate developer, and agreed with the firm to release the land in their favor in exchange for a certain number of apartments. The developer would construct an apartment building both for residential and commercial purposes. Apart from the ones to be given away to the family all units would then belong to the developer. 

The family was keen to reduce tax, obviously. How the tax liability was to be estimated was a big question though. There was no specific reference to such transactions in the law. Neither was there any case study which was referenced in the past. At least this is what the tax consultants noted. Now what remained was how the transaction was actually interpreted: by the family, by the tax consultants, and most importantly, by the tax authorities for assessment. 

What occurred to be a simple and straightforward deal was made out to be complicated. What did actually take place? An implied sale of the land for the consideration of market value of the apartment units given in exchange. None would agree to this analysis, though, especially if the tax liability increased.

Let us elaborate. Cost of land after indexation was negligible. So the capital gain was almost equal to the consideration given. The market value of apartments given away was at Rs.3,000 per sqft. Meaning, if the apartments were sold immediately after possession, the family would get that rate. That's a deemed and implied sale. 

1) 3 apartments of 1000 sqft each: 3x1000x3000 = Rs.9 m;

2) 1 apartment of 5000 sqft: 1x5000x3000 = Rs.15 m;

3) 1 apartment of 3000 sqft: 1x3000x3000 = Rs.9 m.

That's a total market value of Rs.33 m; and a capital gain of Rs.33 m. At 20% rate, the tax liability would be Rs.6.6 m. Net cash flow to the family would be Rs.26.40 m.

Because the deal missed one step of the transaction, it appeared to be complicated. Consider this: Step 1 was sale of land; Step 2 was receipt of Rs.33 m towards sale of land; Step 3 was purchase of 5 apartments totaling 11000 sqft at the market price of Rs.3,000 per sqt; that is Rs.33 m. If these steps were carried out, the capital gains would be Rs.33 m. Just because Step 2 and Step 3 were bundled together, the fact does not change, does it? 

Of course, the family is eligible to take deductions on account of the purchase of one apartment to reduce the tax liability. Everything else should remain the same. 

No wonder there is this perverse human character that takes pleasure in making simple things difficult.