One in 10 firms have over 5% dividend yield

Dividends losing their sheen.

A booming equity market spells doom for a particular class of equity investors "" widows and orphans, trusts, retirees and their ilk "" who kept their faith in the market not because of the hit-and-run gains popular with day traders but because of the steady dividend cheques they receive in the mail.

As stock valuations shoot through the roof, the dividend yield -- the dividend amount as a share of the stock's current market price -- falls. So much so, that at some point it makes sense to invest fresh money in the neighbourhood bank than in an upbeat stock market.

Indeed, of the 1,000 dividend-paying companies, not more than 100 have a dividend yield of more than 5 per cent. This is the going rate for a one-year fixed deposit in a bank.

 

High yielding varieties
	Dividend yield (%)		Market price (Rs)
	A year ago	Current	A year ago	Current
PNB Gilts	8.28	12.57	30.20	19.89
Chaman Lal Setia Exports	17.87	11.34	17.35	22.05
KSE	7.87	9.53	63.50	104.90
G G Dandekar	2.53	9.52	59.21	68.25
Bongaigaon Refinery	3.39	8.36	79.75	92.15
Wim Plast	7.04	8.02	49.70	43.65
Paper Products	2.60	7.51	192.00	199.70
Alstom	4.05	7.23	74.05	82.95
Pee Cee Cosma	9.56	6.51	26.15	38.40
Chambal Fertilisers	7.36	6.41	20.39	24.95
HPCL	5.11	5.92	391.35	371.40

Investors like stocks with strong dividend yields for other reasons too. One, they are more profitable in the long run in terms of price appreciation.

Last year, around the same time, there were 165 companies with a dividend yield of over 5 per cent. The prices of these stocks appreciated by over 36 per cent in the past 12 months, whereas the remaining 835 stocks appreciated by around 21 per cent in value.

Two, the returns posted by these dividend-paying companies exceed the returns in the market. In the past 12 months, the Bombay Stock Exchange Sensex gained around 18 per cent and the broader BSE 500 appreciated by over 22 per cent.

As a result, mutual fund schemes that link themselves with dividend yields have been posting slimmer returns. Of the three dividend yield schemes floated since February 2003, the earliest, Birla Dividend Plus, offered a return of 16.5 per cent between November 1 and December 10, whereas a recent product, Principal Dividend Yield Fund, has posted gains of 7.4 per cent. Principal launched the fund only in September 2004.

The Tata Dividend Yield Fund, which entered the market in October 2004, managed to post a slim 5.59 per cent return in the November 1-December 10 period.

Individually, the scrips of 5 per cent-plus dividend yield companies such as Aeonian Investment, Mayur Leather Products, Oreint Abrasive, Zenith, Swasti Vinayak Synthetics, Beck India, Usha Martin Infotech, Dynamic Industries and Ratnabali Capital Markets have appreciated by over 100 per cent in value in the last 12 months.