Looking for dividend yields

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For those who are beginning to pick stocks on their own, looking out for high-dividend-yield stocks may be a good beginning to make.

There are several reasons why investing in dividend-yield stocks may turn out to be good strategy, but the chief advantage is that it is less risky a bet and dividends are tax-free under the extant income tax rules.

First, some basic understanding: dividend per share paid by a company, divided by the market price of the share, gives you the dividend yield. For instance, if a company gives a dividend of Rs 2 per share and the market price is Rs 40, the dividend yield would be 5 per cent.

Large companies may spread the total dividend over the year in the form of interim and final dividends. Other things being equal, companies that pay interim dividends should be preferred over those that pay a one-time annual dividend, as it improves the net present value of your inflows.

One advantage you have with dividend-yielding stocks is that you can comfortably hold them in a falling market or a bearish phase. And bear phases, when they commence, can last for a long time.

In a gloomy bearish market you are not inclined to sell your high-dividend-yield stocks, because they are earning you real income at the end of each year. So you can afford to wait with these stocks in your D-mat account.

Having a high-dividend-yield stock in your portfolio is like curling up with your favourite thriller on an eight-hour international flight. You wont know when the bearish market ends and a bull market begins.

And because you hold them through the bad times, you are most likely to sell them at a profitable price some times later.

There are some things which you need to keep in mind while short-listing candidates in which to invest. First and foremost, when you invest, look at history. Companies that have paid dividends for at least three consecutive years should be shortlisted. Also look at whether the dividend is stable, rising or erratic. An erratic dividend track record means the company cannot be depended upon to give you the comfort of visibility that you want.

Also look at the dividend payout ratio. A higher payout ratio combined with poor management rating may be avoided. A high-dividend-yield combined with a low payout ratio gives the company enough elbow room to maintain the dividend in leaner times.

But you need to understand the nature of the business and promoters. Trading companies would normally not have any major capex plans, so they may have a higher payout ratio. The MNCs operating in India too have had a record of higher dividend payout ratios.

Now, the sad part of the story. A high dividend is only one leg of the transaction. The other requirement is to have a low price. That means that the dividend yield stock that you may pick is likely to be a market laggard and an underperformer and from an industry that is down in the dumps. That also happens to be your ticket to the moon.

Take the public sector oil companies like HPCL, which goes at a dividend yield of 7.3 per cent or Indian oil at yield 4.8 per cent. These companies are out of favour at present, because of their inability to price their products.

These are not inefficient companies but are forced to sell at un-remunerative prices under Government duress. So if you have a longer-term horizon of, say, five years, you can take a bet that two or more Governments later sanity would prevail and these companies would be allowed the independence to price their products.

By that time, these companies would also have their upstream operations in place. These companies are also sitting on huge prime land. And their pumps, by their nature, are always on the road, which makes them hugely attractive from the asset valuation point of view as well.

Whether you look at them or any other stocks, make it a point to average lower as the yields will only become better as they go down.

Disclaimer: The companies mentioned in this column may have been recommended earlier at lower levels to Anagram's clients