Why Every Indian Retiree Should Focus On Dividend Income?

As we read the news or Indian economy slowing down every day in the newspaper, or we watch the news where they talk about layoffs, we get more and more confused. We get confused about how will a slowing economy impact us? Why is it slowing down?  And as a collateral damage RBI reduces the interest rate, that makes us fear for our monthly income going down. Dividend income is a nice passive income source that can provide a nice financial cushion to you.

Why Every Indian Retiree Should Focus On Dividend Income? As inflation remains low and the economy slows down, RBI will have to cut rates. That means the interest rate on fixed deposit will go down. The income from fixed deposits is taxable. Dividend from stocks is a good alternative, provided we do not face capital loss. If you can build up a stock portfolio which pays a dividend, that will be a great asset during retirement. 

Stocks are not investment vehicle if your investment horizon is anything less than 10 years. Because many things can happen to a business and economy, over the years stocks do go up as long as that is a great business. There is a very little chance that your next-door neighbor or your broker cares about your money the way you do.

While stock market volatility might make you feel that stocks are not a good investment, but do remember the Indian economy has grown 6 times in the last 30 years, the stock market has given better results, if you can find few businesses with strong moat, you will be all set for retired life.

PSU stocks can be a good source of dividend income. Look for debt-free PSU stocks, which are dealing with commodities. PSU banks are retail outlets where the government does charity with taxpayer money. Do not expect to see any meaningful return from those. And eventually, the private sector will take away the business anyway. To be fair to the private sector, the customers will leave government sector banks due to poor service.

This is applicable to any other retail facing government business. Think about the service BSNL provided. It was a great disservice. There is a strong reason why mobiles save millions of BSNL retail customers. Government companies definitely have some purpose, mainly to keep the reservation system alive and to provide pension to many government employees, and these companies help brides father to sleep well that groom works in the government sector. Other than that, probably some of these companies can help us earn good dividend yield on our investment.

Does the low-interest rate help the economy?

First of all, if If the Indian economy has to do better Since the inflation rate is low, The interest rate has to come down. And as the interest comes down in India, that means it is simply bad for the retirees who depend on the interest income from life savings which is saved in Bank as fixed Deposit.

But what happens if the interest rate doesn’t come down? Then the companies or the industries in India will have to borrow money for a higher price which would mean a higher cost of capital and the higher cost of capital makes these companies uncompetitive in Global Market. The global peers can borrow money at a very low rate since most of the developed market has now negative yield or very low-interest rate.

So Bringing Down the interest rate is another way to make Capital cheaper for these companies. So that these companies can bring down their cost and keep themselves globally competitive. As companies become competitive, they will be able to export and compete with global competitors, that means more job creation. And more jobs would be better for the Indian economy.

What is the relation between the interest rate and inflation?

There’s another reason why the RBI can bring down the interest rate. That is inflation. For a long time in India inflation is in under control. Now the government says the RBI has the mandate to control the inflation, which is true.  Maybe it’s RBI. Maybe is just a slowing economy. As a matter of fact, interest rates are going down since inflation is low.

RBI is bring down the rates.  When the retirees such as my parents would want to renew their fixed deposit next time they’ll be getting a lower interest rate. That means less income for them.

Some of us do not have a pension, so there is no fixed income. Basically, this interest income is the only source of our monthly income. And when it is going down that is simply not good. Your discretionary income is going down. The net cash flow is going down.

That is why I say that every one of us should focus on dividend income. Dividend income is completely passive, you do not have to do anything, the companies will pay out part of their profit to you every year. And dividend income up to 10 lakh per year is tax-free in India. I have another post in detail regarding tax rate applicable on dividends in India.

In theory – with a low-interest rate, the economic activity should go up, the consumer should borrow and buy more. Companies should do more CAPEX and hire more, eventually, that should push inflation up and to counter that central banks increase the interest rate. I said, in theory, because we did not see this happening in Japan, Europe or in the USA.

Is there another option other than Dividend Income?

There is another option that is rental income. You buy another property, you find the tenant and you hope that the tenant is good, pays you every month. And doesn’t do much damage to your home. But with so many taxes And so many maintenance costs, Rental income Probably is not going to do much.

Say you built a house for 50lakhs, you are paying taxes on it and with maintenance charges, if you get 15 thousand rent per month, that means you are getting 1,80,000 INR every year, pre-tax income. Excluding all other expenses, that is like a 3.5% yield on your 50 lakhs investment. Which is pretty low, don’t you agree?

Why  PSU stocks can be good dividend income stocks?

But there are PSU stocks. Which can give you four or five percent dividend income on your invested capital? Those are not really great stocks though. I will never say that that stock price will double or triple for those stocks with high yields. Probably they will never double it triple, but currently in August 2019 when the market is already trading at lower valuations, that means there is a very limited downside.

I’m not saying that the market will not go down from here. But even if they do it is a good opportunity to buy more stocks. These Common Stocks. / companies are not going anywhere as long as they are sitting on huge reserves of oil, iron, aluminum, and other natural resources.

Any consumer-facing businesses government has, companies like BSNL MTNL. Those are bleeding Indian taxpayers money. Those are going to die. Eventually. They don’t make any money because of their horrible customer service.

But companies like ONGC or Oil India. These are sitting on huge reserves of oil and 80% of oil in India are imported. So even if the electric vehicle comes, India will still need some oil and ONGC and oil India can be supplying those oils and as they sell that oil. They will generate Revenue and as they generate profit and they will share the profit with the owner, which is the government.

The Government needs money from these companies because they do not generate enough tax revenue. So all these assets the Government has, they’re trying to sell those assets are they are trying to get the dividends from all these companies. While these cash extraction operations are killing those companies but there is one opportunity as for us as retail investors. We are getting those dividends too while we own those stocks along with the Government and all I am trying to explain is we can take advantage of the situation and Make it work on our advantage.

Are PSU stocks never going to grow in market capitalization/ price?

I think as most stocks are touching the flow already, we can invest in commodity stocks. Do not invest in any retail facing company. At least I do not. Because private sector companies will offer better customer experience and take the business away from government-owned companies.

Moreover, the commodities can be a good hedge against inflation. Iron, oil and all other minerals will at least keep up with inflation and occasionally surpass them. When fear takes over, the prices will come down, but that is the best time to go in.

Do you have any other options to invest in?

Yes, you can invest in senior citizen savings scheme, government bonds, NSC, etc. But all income from instruments is taxable. There are tax-free bonds, mostly bonds from NHAI or infra bonds those offer less interest or coupon payments. I will highly recommend that you deal with the poor service in government offices and invest in government instruments, as we witnessed how private sector finances crumbled recently. I will not put my retirement savings in corporate debt instruments, and I would suggest you not to do so either.

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