Investing in Divided Shares vs. Earning Profit Shares: A Comprehensive Guide

When delving into the world of investments, it's crucial to understand the options available and their implications. This article explores the differences between divided shares and earning profit shares, providing insights and practical advice for investors. Remember, past performance is no guarantee of future trends.

Understanding Earning Profit Shares

By earning profit shares, we typically refer to situations where the share value appreciates over time, and you can sell the shares for a profit. This can be a rewarding strategy, especially if the market is favorable. However, once you sell these shares, you sever your relationship with the company. Therefore, it's essential to sell enough shares to recover your initial investment and retain the rest for the company's further growth.

For example, in India, the two primary types of shares are divided shares. Here, we usually mean shares that pay regular dividends. However, it's noteworthy that many sectors in India have seen reduced dividend frequencies and rates this year. It's important to remember that the dividend declared by a company is usually based on the face value of the share, often set at Rs. 10 per share. For instance, if a company declares a dividend of 30, it means you will receive Rs.3 per share, not 30.

Dividend Yield and Real Returns

Let's illustrate this with an example. Hindustan Unilever recently declared an interim dividend of 900, but since the face value of the share is Rs. 1, the actual dividend amount is Rs. 9 per share. If the share price is more than Rs. 1500, the dividend yield (dividend per share divided by share price) is 9/1500, which equates to approximately 0.6%. This is a very low yield and indicates that purchasing shares solely for dividends might not be the best strategy unless you are a multi-millionaire looking for several tax-free income sources.

High Dividend Yield Shares and Growth Considerations

High dividend yield shares often attract investors seeking stable income. However, these are often businesses with limited growth prospects, and the management often distributes profits to shareholders because they don't know what else to do. On the other hand, businesses that are profitable and growing often choose not to pay dividends, instead reinvesting earnings to expand their operations, reduce debt, and create more value for shareholders.

Typically, high dividend yield shares trade at a P/E ratio of 6-8, while rapidly growing companies often trade at a premium. It's important to assess when a company might stop growing, although this prediction is often challenging and highly uncertain.

Further Reading and Suggestions

If you're interested in delving deeper into diversification and investment strategies, consider reading books by Peter Lynch. Peter Lynch is renowned for his detailed explanations of various types of businesses and strategies for investing in them. These resources can provide valuable insights and a broader perspective on investment decisions.

Remember, the key to successful investment is thorough understanding and informed decision-making. Always conduct your own research and consider the long-term prospects and potential returns before making any investment.