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Rediff.com  » Getahead » Making money in stocks is THIS simple! :-)

Making money in stocks is THIS simple! :-)

August 31, 2014 11:11 IST

When to sell a stockBuy shares of a good profitable, successful business, hold on for inordinately long periods of time, and live off the dividends. You will surely get wealthy in the long run.

If you want to get wealthier, use the dividends to buy MORE shares in the same company.

Let us say you have shares of HDFC Ltd., a very successful home mortgage company. You just received a dividend of Rs 280,000 on your holdings. What do you do with the money? Well you can celebrate, use it for household expenses, or buy stocks of the same company.

Instead of wondering which share to buy with this nice amount, just go and buy 28 shares of HDFC Ltd which is currently trading at around Rs 1000. Thus you have converted a dividend scheme to a growth scheme.

Similarly if you have/had Tata Power, Tata Motors, Ashok Leyland (by the way they skipped dividend this year).

Re-investing dividends is a brilliant tool available for the younger shareholders who have an independent source of income. However if you are older you may need the dividends to meet your day to day expenses. The advantage of using such steps is simple.

You can tune out of the screaming on television about coal scam, how interest rates will go up in two weeks, but interest rates will come down in three months.

How the melt down in US will hit the growth of IT companies... blah blah blah.

Just remember that the market is a slave of honest management, earnings per share, and an increasing price earnings ratio. When a company shows awesome results quarter after quarter, shows tons of free cash flow, shows super growth without using great amounts of capital, stock price has to go up.

Look at TCS: if you were a regular investor who bought it at Rs 800 odd about 10 years ago your money has gone up more than 10 times, and the dividend is about 20 per cent of your investing.

You really cannot ask for something much more than this, right?

Illustration: Dominic Xavier/Rediff.com

P V Subramanyam