From mint · Sharmila Bhadoria · · 50s
Dividend stock or trap? 3 checks for smart picks
Expert reveals 3 metrics to avoid dividend traps and find income stocks.
In brief
Expert reveals 3 metrics to avoid dividend traps and find income stocks. Pankaj Pandey of ICICI Securities says dividend yield alone is risky; investors should check earnings growth, valuation multiples, and business strength for better returns. Originally reported by mint.
Dividend yield risks
Dividend yield alone shouldn't be the sole basis for stock selection.
“High dividend is attractive; however, the durability of the dividend is what matters”
Expert's warning
Pankaj Pandey, Head of Retail Research-ICICI Securities, says high dividend yield isn't enough.
“High dividend yield in absolute terms should not be the sole criteria for stock selection”
Key metrics
Investors must check earnings growth, valuation multiples, and business strength.
“Expected shareholder return ≈ Dividend yield + Earnings growth ± Change in valuation multiple”
Business growth focus
Look for capital efficiency, cash flow, and balance sheet strength to ensure real gains.
“Evaluating overall business growth in terms of its capital efficiency, cash flow generation, runway for growth, balance sheet strength, and valuations would ensure real gains from investment”
Real-world example
Company A with 7% yield but no growth versus Company B with 3% yield but strong reinvestment potential.
“Suppose there is this Company A which offers a 7% dividend yield but has no growth and mediocre incremental returns. Now there is Company B which offers only a 3% yield but can reinvest its retained earnings at 18, 20% ROCE and compound earnings for the next decade”
The one thing
Pankaj Pandey of ICICI Securities says dividend yield alone is risky; investors should check earnings growth, valuation multiples, and business strength for better returns.
