The uncertainty in the equity markets over extremely negative global cues (political instability in the Arab world, natural disasters in Japan and other regions, and several other factors) could skew demand in favor of stocks that pay handsome dividends than stocks that hold the possibility of handsome price appreciation. Few cents of dividends that are sure to add to your bank balance are worth more than a dollar of uncertain price appreciation.
The case of BSI vs PZD
As on March 16, 2011, Alon Holdings Blue Square Israel Ltd (NYSE:BSI) shares gave the highest dividend yield of 37.18% while PowerShares Cleantech Portfolio (ETF) (NYSE:PZD) gave lowest dividend yield of 0.02%. Does this mean returns from BSI shares are better than PZD shares? Think again. As on March 16, 2011, 52 week price change in PZD share was a gain of 13.21% while it was a price loss of 20.4% in BSI share. Does this mean total return on PZD share is better than total return on BSI share? In the case of an investor who already holds these two shares, PZD could be adding value to his/her portfolio while BSI share may be wiping off the value of the portfolio. While the simple arithmetic suggests that PZD is better than BSI, I use the word ‘may' as stocks add value to a portfolio from several angles, say for instance ‘beta'. In the case of an investor who is yet to buy any of these two stocks, BSI shares are currently cheaper and add more value to his/her portfolio.
Points to consider while looking for dividends
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Yield vs actual
A stock with a high dividend yield may not necessarily increase your bank balance or your portfolio value. That high dividend yield might actually be the result of the market's negative view on that stock's present worth or even future value.
Regular vs irregular
Again consider the case of BSI vs PZD. Though BSI declared a dividend of $3.39 per ordinary share or ADS on October 18, 2010, US citizens received only $2.44 dividend per share as a tax of 28% is withheld from dividend distributions. Moreover, BSI's dividend on October 18 was unusually high due to conversion of debentures and realization of employee stock options. For the recently ended quarter (Dec 2010), the company hasn't announced results and dividend – this means that the company hasn't been regular in paying its dividend.