Beta to Dividend

Beta to Dividend

In an uncertain market people would like to make long term investment in those shares which gives good dividend yield. Because they think that these shares are safer since they produce good dividend yield and assumes that this dividend will help to compensate the possible loss in the market price of the share.

The idea is simple: for investing in any stocks the investor is taking a risk (beta). For taking that risk, he need a particular percentage of return to compensate it and if he gets a premium (dividend) that can compensate the part of risk, with this excess return from dividend.  But not all dividend yield shares deliver this objective due to the high risk associated with some of those shares.

In such circumstance one can adopt a more-conservative way of dividend investing with a strong focus on capital preservation where investment is made on high-quality companies with high dividend yield and less exposure to the risk (beta). So that above-average dividend yields help to add their overall returns, and low beta preserve the stock from the extreme price movements and defend the stock from a steep fall in the price in a volatile market.  

Some shares will give high dividend yield but may have high risk and some others may have low risk but low dividend yield. So one have to find those shares which has an optimum combination of high dividend yield and low risk. How can one find a share with such an optimum combination? Here one can use this new ratio called beta to dividend ratio. This ratio is developed with a strong focus to deliver optimum combination of high dividend yield and low risk.

The formula:

 Beta to Dividend Ratio = Beta / Dividend Yield

A lower the Ratio indicates the more optimum in the combination in other words low ratio means better.

Example:

Company A: dividend yield 4.5, beta 0.85

Company B: dividend yield 4.5, beta 0.20

Company C: dividend yield 6.5, beta 0.85

Beta to Dividend Yield Ratio

Company A: 0.85/4.5 = 0.18

Company B: 0.20/4.5 = 0.04

Company C: 0.85/6.5 = 0.13

From the above example it is understood that company B is giving the optimum combination of high divided yield and low risk.

-         Krishnan Thampi K

Head - Research

Capstocks & Securities (India) Pvt Ltd.