A STUDY ON THE STOCK PERFORMANCE OF HIGHER DIVIDEND YIELDING COMPANIES With special reference to HEDGE Equities Ltd, Thrissur

PROJECT REPORT
Submitted in partial fulfillment of the requirements for the award of Degree of

MASTER OF BUSINESS ADMINISTRATION of the

UNIVERSITY OF CALICUT

By

ARUN.N.OUSEPH
( Reg. No: EJALMBA010 ) Under the guidance of Mrs. DIVYA SUNNY
MBA

Assistant Professor

ELIJAH INSTITUTE OF MANAGEMENT STUDIES

THRISSUR APRIL 2013

Abstract
The study of stock performance of higher dividend yielding companies is to make analysis over the stock market. How the dividend payment helps them in stock performance and what are the other factors affects the performance of the company.

Introduction
As we all know that High Dividend Yield Stocks can be consider as a safe haven where safety has greater priority compared to high returns. Specially, when the market remains volatile and lot of uncertainty arises due to headwinds coming from Domestic and Globally. Investors can still get a decent return on the Investment made in High Dividend Yield Stocks. Investing in a kind of High Dividend paying companies is also one of Value Investing Strategy. Dividend is a direct income for a shareholder without selling any of the holdings. Therefore a shareholder can hold on to the stock and still earn an income sitting at home. In a bull market, dividend would add to the overall capital appreciation and improve gains. In a bear market, a high dividend stock can offset some of the capital loss. Hence, a high dividend stock would always find favor in any market conditions. Rising dividends also indicate financial soundness of a firm and a strong cash flow. Increased market volatility has placed dividend-paying stocks back into the spotlight. These securities have been long valued for their defensive characteristics during down markets, but their attractive combination of steady income and capital appreciation potential has also delivered consistent, strong returns across full market cycles. Given this context, equity dividend investing seems particularly relevant in todays market climate. Facing the prospects of slower growth opportunities and more extreme, more frequent market gyrations, investors may be well served by the predictability of dividends to help stabilize and enhance their equity returns.

3. BACKGROUND & PURPOSE OF THE STUDY

Dividends and the companies that pay them are regaining the attention of advisors and investors alike due to their ability to provide a predictable source of steady income, buffer market volatility and offer the potential for capital appreciation. As bond yields have fallen over the past decade, many traditional sources of investment income have become less attractive to investors looking for income. Dividend-paying stocks possess the attributes sought after during a volatile and uncertain marketplace as well as complement or supplement income from fixed income holdings. Furthermore, in addition to paying investors cash to hold their shares, dividend-paying stocks also offer features such as favorable tax treatment, a potential hedge against inflation and a source of portfolio diversification. However, investors often have concerns about dividend paying stocks, especially those with high yields. First, there is a general perception that there simply arent that many stocks with high yields that pay dividends consistently. Another concern is that some stocks only appear to have high yields because they have seen their prices drop significantly. As a trend, this was clearly visible during 2008-2009, when most financial and insurance sector companies had high dividend yields due to sharp deteriorations in their stock prices. Another concern is that high dividend yields may be unsustainable and companies that pay out high dividends may cut or eliminate them in the future. There are also concerns that high dividends are only paid by companies that have reached a mature or declining phase of their businesses and therefore have limited price appreciation potential when compared to high-growth companies that do not pay dividends. A final issue that investors often raise is that there is currently too much focus on dividend stocks and that, as a result, these stocks must be trading at premiums to the market. This study intends to address all these questions and perceived issues while exploring the relationship between stock performance with dividend yield.

4. RESEARCH PROBLEM
Today, with greater volatility the norm and generally more subdued market expectations ahead, investors are increasingly unwilling to rely on capital appreciation alone to fuel their equity investment returns. Consequently, many are once again recognizing the crucial role dividends can play in overall equity performance. Dividend-paying stocks have generated consistent, positive return streams, regardless of general market movements, and the long-term compounding benefits of dividends have been significant. With the volatility trend of the market and how the return over the investment helping to have a good return over share market with regards to investing in the dividend paying shares. The study at HEDGE Thrissur aims to analyze: How the Stock performance of higher dividend yielding companies helps the investors in the stock market?

5. SCOPE OF THE STUDY

Increased market volatility has placed dividend-paying stocks back into the spotlight. These securities have been long valued for their defensive characteristics during down markets, but their attractive combination of steady income and capital appreciation potential has also delivered consistent, strong returns across full market cycles.Given this context, equity dividend investing seems particularly relevant in todays market climate. Facing the prospects of slower growth opportunities and more extreme, more frequent market gyrations, investors may be well served by the predictability of dividends to help stabilize and enhance their equity returns. Here the study helps to understand in which shares need

to be invested to make a fare return over the investment of the share holders in the market. Today, with greater volatility the norm and generally more subdued market expectations ahead, investors are increasingly unwilling to rely on capital appreciation alone to fuel their equity investment returns. Consequently, many are once again recognizing the crucial role dividends can play in overall equity performance.

6. RESEARCH OBJECTIVE
Specific Objective:
The main objective of the study is to have a detailed analysis of various shares to find out the high dividend paying stock and its performance over the market. The study is intended to have a good understanding on how these dividend and market performance are related to each other.

Sub Objectives:
To study the Ability of Dividends to Grow To find out Source of Total Return/Capital Appreciation Potential To see whether the Shares Generate Income in a Low Yield Environment To see whether the volatility of the share price affected by the dividend payment To understand, analyze and study the relationship between share price movement and dividend declaration

7. RESEARCH METHODOLOGY

Research is a scientific and systematic search for pertinent information on a specific topic. The aim of academic research is to acquire knowledge and to apply the sources to understand social phenomena.

7.1 Research Design

The research used in this study is analytical type of research. In analytical research the researcher uses facts or information already available, to make evaluation of available data. In this study the researcher analyses prices of shares, which are historical data and derive conclusions from it.

7.2 Sampling Design

The universe for sampling is BSE index. it has 12 sectors. Various shares from 12 sectors are selected for diversification. The sampling method used here is convenience sampling.

7.3 Variables of the study

A variable, as opposed to a constant, is simply anything that can vary. Every experiment has at least two types of variables: independent and

dependent. The independent variable is often thought of as our input variable. It is independent of everything that occurs during the experiment because once it is chosen it does not change. The dependent variable, or outcome variable, is dependent on our independent variable or what we start with. Here the variables are various shares from BSE index.

7.4 Collection of Data

Most of the data is collected keeping the aim of scope of inquiry & available resources. Proper methods are employed in the collection of data studying the true behavior of available variables under study. The collection of data is the foundation upon which the whole sub structure of statistical analysis is to be raised , therefore the foundation must be properly laid in the absence of accurate data is not possible to analyze the truth behavior of variables. In this study only secondary data is used for analysis

Secondary Data- Secondary data is collected from books, journals, profile of the organization & internet.

7.5 Tools/Techniques used for Data Analysis & Presentation

1.

The Dividend Payout Ratio (DPR)

DPR = Dividends Per Share / EPS

2. DIVIDEND YIELD
Dividend Yield = annual dividend per share / stock's price per share

3. Miller and Modigliani Model (MM Model)

MM Model: Market price of the share in the beginning of the period = Present value of dividends paid at the end of the period + Market price of share at the end of the period. P0 = 1/(1 + ke) x (D1 + P1) Where: P0 = Prevailing market price of a share ke = cost of equity capital Dividend to be received at the end of D1 = period 1 and Market price of a share at the end of P1 = period 1. Value of the firm, nP0 Where: n = (n + n) P1 I +E = (1 + ke) number of shares outstanding at the beginning of the period change in the number of shares outstanding during the period/ additional shares issued. Total amount required for investment Earnings of the firm during the period.

n= I = E =

8. LITERATURE REVIEW

8.1 THEORETICAL FRAMEWORK

Dividends
Dividends: are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.[1] When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends.[2][3] Many corporations retain a portion of their earnings and pay the remainder as a dividend.

A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital.Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to members' activity, so their dividends are often considered to be a pre-tax expense. Dividends are usually paid in the form of cash, store credits (common among retail consumers' cooperatives) and shares in the company (either newly created shares or existing shares bought in the market.) Further, many public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder. The word "dividend" comes from the Latin word "dividendum" ("thing to be divided"). Joint stock company dividends A dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. Forms of payment Cash dividends (most common) are those paid out in currency, usually via electronic funds transfer or a printed paper check. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is USD $0.50 per share, the holder of the stock will be paid USD $50. Dividends paid are not classified as an expense, but rather a deduction of retained earnings. Dividends paid does not show up on an Income Statement but does appear on the Balance Sheet. Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation, or another corporation (such as its subsidiary corporation). They are usually issued in proportion to shares owned (for example, for every 100 shares of stock

owned, a 5% stock dividend will yield 5 extra shares). If the payment involves the issue of new shares, it is similar to astock split in that it increases the total number of shares while lowering the price of each share without changing the market capitalization, or total value, of the shares held. (See also Stock dilution.) Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation, such as a subsidiary corporation. They are relatively rare and most frequently are securities of other companies owned by the issuer, however they can take other forms, such as products and services. Interim dividends are dividend payments made before a company's annual general meeting (AGM) and final financial statements. This declared dividend usually accompanies the company's interim financial statements. Other dividends can be used in structured finance. Financial assets with a known market value can be distributed as dividends; warrants are sometimes distributed in this way. For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded independently. Reliability of dividends Two metrics are commonly used to examine a firm's dividend policy. Payout ratio is calculated by dividing the company's dividend by the earnings per share. A payout ratio greater than 1 means the company is paying out more in dividends for the year than it earned. Dividend cover is calculated by dividing the company's cash flow from operations by the dividend. This ratio is apparently popular with analysts of income trusts in Canada. Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. Dividend dates Any dividend that is declared must be approved by a company's Board of Directors before it is paid. For public companies, there are four important dates to remember regarding

dividends. These are discussed in detail with examples at the Securities and Exchange Commission site Declaration date is the day the Board of Directors announces its intention to pay a dividend. On this day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date. In-dividend date is the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum dividend ('with [including] dividend'). In other words, existing holders of the stock and anyone who buys it on this day will receive the dividend, whereas any holders selling the stock lose their right to the dividend. After this date the stock becomes ex dividend. Ex-dividend date (typically 2 trading days before the record date for U.S. securities) is the day on which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. This is an important date for any company that has many stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be paid the dividend easier. Existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock will not receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's assets resulting from the declaration of the dividend. The company does not take any explicit action to adjust its stock price; in an efficient market, buyers and sellers will automatically price this in. Book closure Date Whenever a company announces a dividend pay-out, it also announces a date on which the company will ideally temporarily close its books for fresh transfers of stock. Record date Shareholders registered in the stockholders of record on or before the date of record will receive the dividend. Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.

Payment date is the day when the dividend cheques will actually be mailed to the shareholders of a company or credited to brokerage accounts. Dividend-reinvestment Some companies have dividend reinvestment plans, or DRIPs, not to be confused with scrips. DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount. In some cases, the shareholder might not need to pay taxes on these re-invested dividends, but in most cases they do. Dividend taxation In many countries, such as the U.S.A. and Canada, income from dividends is taxed, albeit at a lower rate than ordinary income. Though in most cases, the lower tax rate is due to profits being taxed initially as Corporate tax. Australia and New Zealand In Australia and New Zealand, companies also forward franking credits or imputation credits to shareholders along with dividends. These franking credits represent the tax paid by the company upon its pre-tax profits. One dollar of company tax paid generates one franking credit. Companies can forward any proportion of franking up to a maximum amount that is calculated from the prevailing company tax rate: for each dollar of dividend paid, the maximum level of franking is the company tax rate divided by (1 - company tax rate). At the current 30% rate, this works out at 0.30 of a credit per 70 cents of dividend, or 42.857 cents per dollar of dividend. The shareholders who are able to use them offset these credits against their income tax bills at a rate of a dollar per credit, thereby effectively eliminating the double taxation of company profits. This system is called dividend imputation. UK The UK's taxation system operates along similar lines to Australia and New Zealand: when a shareholder receives a dividend, the basic rate of income tax is deemed to already have been paid on that dividend. This ensures that double taxation does not take place, however this creates difficulties for some non-taxpaying entities such as certain trusts, charities and pension funds which are not allowed to reclaim the deemed tax payment and thus are in effect taxed on their income.

India In India, companies declaring or distributing dividend, are required to pay a Corporate Dividend Tax in addition to the tax levied on their income. Dividend received is exempt in the hands of the shareholder's, in respect of which Corporate Dividend Tax has been paid by the company. Effect on stock price After a stock goes ex-dividend (e.g. the financial obligation for the company to pay the dividend to the holder), the stock price should drop. To calculate the amount of the drop, the traditional method is to view the financial effects of the dividend from the perspective of the company. Since the company has paid say $x in dividends per share out of its cash account on the left hand side of the balance sheet, the equity account on the right side should decrease an equivalent amount. This means that a $x dividend should result in a $x drop in the share price. A more accurate method of calculating this price is to look at the share price and dividend from the after-tax perspective of a share holder. The after-tax drop in the share price (or capital gain/loss) should be equivalent to the after-tax dividend. For example, if the tax of capital gains Tcg is 35%, and the tax on dividends Td is 15%, then a $1 dividend is equivalent to $0.85 of after tax money. To get the same financial benefit from a capital loss, the after tax capital loss value should equal $0.85. The pre-tax capital loss would be $0.85/ (1-Tcg) = $0.85/(1-35%) = $0.85/65% = $1.30. In this case, a dividend of $1 has led to a larger drop in the share price of $1.30, because the tax rate on capital losses is higher than the dividend tax rate. Finally, security analysis that does not take dividends into account may mute the decline in share price, for example in the case of a Priceearnings ratio target that does not back out cash; or amplify the decline, for example in the case of Trend following. Criticism Some believe that company profits are best re-invested back into the company: research and development, capital investment, expansion, etc. Proponents of this view (and thus critics of dividends per se) suggest that an eagerness to return profits to shareholders may indicate the management having run out of good ideas for the future of the company. Some studies,

however, have demonstrated that companies that pay dividends have higher earnings growth, suggesting that dividend payments may be evidence of confidence in earnings growth and sufficient profitability to fund future expansion. Taxation of dividends is often used as justification for retaining earnings, or for performing a stock buyback, in which the company buys back stock, thereby increasing the value of the stock left outstanding. When dividends are paid, individual shareholders in many countries suffer from double taxation of those dividends: 1. the company pays income tax to the government when it earns any income, and then 2. when the dividend is paid, the individual shareholder pays income tax on the dividend payment. In many countries, the tax rate on dividend income is lower than for other forms of income to compensate for tax paid at the corporate level. Capital gains should not be confused with dividends. Capital gains assumes an increase in a stock's value. Dividend is merely parsing out a share of the profits, and is taxed at the dividend tax rate. If there is an increase of value of stock, and a shareholder chooses to sell the stock, the shareholder will pay a tax on capital gains (often taxed at a lower rate than ordinary income). If a holder of the stock chooses to not participate in the buyback, the price of the holder's shares could rise (as well as it could fall), but the tax on these gains is delayed until the actual sale of the shares. Certain types of specialized investment companies (such as a REIT in the U.S.) allow the shareholder to partially or fully avoid double taxation of dividends. Shareholders in companies that pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding, or when a company is wound down and all assets liquidated and distributed amongst shareholders. This, in effect, delegates the dividend policy from the board to the individual shareholder. Payment of a dividend can increase the borrowing requirement, or leverage, of a company.

Dividend Yield
Definition of 'Dividend Yield' A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields. To better explain the concept, refer to this dividend yield example: If two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement his or her income would likely prefer ABC's stock over that of XYZ.

The dividend yield or the dividend-price ratio of a share is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share. It is often expressed as a percentage.

Dividend yield is used to calculate the earning on investment (shares) considering only the returns in the form of total dividends declared by the company during the year. Its reciprocal is the Price/Dividend ratio. Preferred share dividend yield Dividend payments on preferred shares ("preference shares" in the UK) are set out in the prospectus. The name of the preferred share will typically include its yield at par: for example, a 6% preferred share. However, the dividend may under some circumstances be passed or reduced. The yield is the ratio of the annual dividend to the current market price, which will vary.

Common share dividend yield Unlike preferred stock, there is no stipulated dividend for common stock ("ordinary shares" in the UK). Instead, dividends paid to holders of common stock are set by management, usually with regard to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. The historic yield is calculated using the following formula:

For example, take a company which paid dividends totaling $1 per share last year and whose shares currently sell for $20. Its dividend yield would be calculated as

follows: The yield for the S&P 500 is reported this way. US newspaper and web listings of common stocks apply a somewhat different calculation: they report the latest quarterly dividend

multiplied by 4 divided by the current price. Others try to estimate the next year's dividend and use it to derive a prospective dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Index[1]. Estimates of future dividend yields are by definition uncertain.

Forward dividend yield Forward dividend yield is a measure of estimating the future yield of a stock. The calculation is done by taking the first dividend payment and annualizing it and then divide that number by the current stock price. In other words if the first quarterly dividend was $0.04 and the current stock price was $10.00 the forward dividend yield would be (.04*4)/10= 1.6%. The trailing dividend yield is done in reverse by taking the last dividend annualized divided by the current stock price. Related measures The reciprocal of the divided yield is the Price/Dividend ratio. The dividend yield is related to the earnings yield via:

earnings yield = dividend yield dividend cover, and dividend yield = earnings yield dividend payout ratio.

Desirability Historically, a higher dividend yield has been considered to be desirable among many investors. A high dividend yield can be considered to be evidence that a stock is under priced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher. Some investors may find a higher dividend yield attractive, for instance as an aid to marketing a fund to retail investors, or maybe because they cannot get their hands on the capital, which may be tied up in a trust arrangement. In contrast some investors may find a higher dividend yield unattractive, perhaps because it increases their tax bill.

Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments. The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some investors as indicative that the market is still overvalued. Dow Industrials The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred in 1932 when it yielded over 15%, which was years after the famous stock market collapse of 1929, when it yielded only 3.1%. With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000. The Dogs of the Dow is a popular investment strategy which invests in the ten highest dividend yield Dow stocks at the beginning of each calendar year. S&P 500 In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public company earnings increased slower than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings

9. BIBLIOGRAPHY
9.1 JOURNALS
Janusz Brzeszczyski, Jerzy Gajdka, 2008 Investment Management and Financial Innovations, Volume 5, Issue 2, 2008

9.2 WEBLIOGRAPHY
http://rakesh-jhunjhunwala.in/index.php/2012/08/11/high-dividend-paying-stocks-inindia/#&panel1-7 http://www.tutorsonnet.com/homework_help/dividend_decisions/miller_and_modigli ani_model_assignment_help_tutoring.htm http://www.nseindia.com/

http://en.wikipedia.org/wiki/Dividend_yield