As already mentioned earlier, the main advantage of the dividend option is that you can get regular periods if the ELSS performs well. You can use this amount in any way that you want.
On the flip side, you will not get the advantage of compoundingyour investments if you use this option. The fund house will deduct the value of the dividend payout from the NAV whenever the dividend is actually paid out to you. This deduction doesn't happen in case of the growth option since no dividend is paid out.
Hence, when you check the NAVs, you will find that the NAV of the dividend option of an ELSS is less than that of the growth option. Let us take an example to understand why this happens:
Suppose there is a fund which is declaring dividends for the first time. Before declaration, the NAV of both options will be the same. However, once the dividend is paid out, the NAVs will become different.
Hence, choose the growth option if you are really interested in building wealth and have no problems in keeping the entire amount (initial investment + returns) in the fund throughout your holding period.
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FAQs
Dividends can also attract investors who prefer a steady income stream or who benefit from preferential tax treatment on dividends. However, dividends can also reduce the value of a company by decreasing its retained earnings, which are the funds that can be used for reinvestment, expansion, or debt repayment.
What are the disadvantages of dividend investing? ›
Other drawbacks of dividend investing are potential extra tax burdens, especially for investors who live off the income. 3 Once a company starts paying a dividend, investors become accustomed to it and expect it to grow. If that doesn't happen or it is cut, the share price will likely fall.
What are the disadvantages of a dividend policy? ›
The primary drawback of the stable dividend policy is that investors may not see a dividend increase in boom years. Under the constant dividend policy, a company pays a percentage of its earnings as dividends every year. In this way, investors experience the full volatility of company earnings.
What are the negative effects of dividends? ›
Dividends paid out as stock instead of cash can dilute earnings, which can also have a negative impact on share prices in the short term.
What is the big drawback to dividend trading? ›
Since you are placing a sizable amount of your money in one sector, investing in dividend-paying companies may limit portfolio diversification. This could be a worry for investors who want to spread their money across different industries and sectors.
Why avoid dividends? ›
It's prudent to focus on long-run total return, rather than income only. Dividends -- either reinvested or taken in cash -- lead to a higher tax bill. Dividend-paying stocks carry unsystematic risk, which could otherwise be diversified away.
Why is dividend negative? ›
No, the dividend yield cannot be negative.
A company pays dividends depending on the company's level of profitability within the given duration. When a company has higher profits, it's likely to pay higher dividends and lower dividends when the profits are low.
What are the risks of dividend payout? ›
“The risk would come around uncertainty or visibility of that future income stream,” Loop says. That could put a greater focus on a company's return on equity and cash flow compared to its total debt.
What are the disadvantages of dividend mutual funds? ›
Mutual funds come with many advantages, such as advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
What are the disadvantages of proposed dividend? ›
Disadvantages of Proposed Dividend
A proposed dividend provides funds only for a short period. In other words, it provides funds for only the interim period between when the BOD's proposed dividend and when it gets distributed to the company's shareholders.
Dividends may not be paid if (1) the business is insolvent (i.e., unable to pay its debts as they become due), (2) paying dividends would make it insolvent, or (3) payment would violate a restriction in the articles of incorporation.
Is dividends an advantage or disadvantage? ›
The stock dividend has the advantage of rewarding shareholders without reducing the company's cash balance. However, it does increase its liabilities. Stock dividends have a tax advantage for the investor as well. Like any stock shares, stock dividends are not taxed until the investor sells the shares.
What are the advantages of a dividend policy? ›
Overall, a stable dividend policy can provide numerous benefits to both companies and investors. By offering predictability, stability, and discipline, companies can build trust with investors and attract more capital. Meanwhile, investors can benefit from regular cash flows and reduced volatility.
What are the cons of dividend reinvestment? ›
Dividend reinvestment has some drawbacks. One downside is that investors have no control over the price at which they buy shares. If the stock gains significant value, they'd still buy shares at what could be a high price.
What is the benefit of a dividend? ›
Advantages of dividends
With the power of compounding interest and the option to reinvest dividends back into the stock, this consistent income can help an investor build wealth over time. Regular dividends can be especially beneficial for investors who rely on their investments for income, such as retirees.
What are the disadvantages of dividend cover? ›
Nevertheless, there are some disadvantages of the ratio that should be taken into account. Net income, which is used in the formula, does not always equal cash flow. A company can report a high net income, yet in reality, does not have sufficient cash available to make dividend payments.
