These stocks can make up for the capital loss in a sliding market.
One of the many lessons the stock market crash should have taught mass investors (middle-class investors in for the long haul) in India is to expand their appetite and seek stocks that pay out good and consistent dividends.
Traditionally, Indian investors’ mentality has been to look at the capital appreciation of the invested amount alone. But it pays well to add dividend-yielding stocks to your portfolio.
Sharad Gadodia, director of SSG Broking said, “Some stocks that yield very high dividends have the potential to actually make up for the capital loss in the stock.” Dividends declared by Wyeth, for example, added 8.17 per cent (Rs 37 per share) in 2008-09 for those investors who had made the purchase a year earlier.
“This almost made up for the loss in the value of the share of Rs 38 per share in the period of the stock market crash,” explained Gadodia.
A dividend yield, simply, is an indicator that shows how much a company pays out as dividends annually, relative to its share price. Generally, a stock with a dividend yield of over three per cent is considered good.
Stock brokers note that while fast moving consumer goods (FMCG) and multi national company (MNC) stocks are high-dividend yield stocks, typically. There are other industries also that tend to pay out good and consistent dividends.
Hemen Kapadia, CEO of Chartpundit.com said, “The sectors differ on rotational basis.”Currently, the pharma sector has outperformed.
Additionally, dividends received on equity shares are tax-free. It is necessary to understand the rationale behind dividend payouts.
Some companies can declare a huge one-off dividend payment. Investors should check the basics in such cases.
| CONSISTENT DIVIDENDS (2003-2008) | ||
| Companies | Dividend Yield (%) | Dividend Growth (%) |
| LIC Housing Fin | 4.59 | 15.70 |
| Madras Cement | 6.06 | 97.50 |
| SRF | 7.63 | 21.10 |
| Tata Chemicals | 6.00 | 15.60 |
Here are some tips to choose high-dividend stocks:
- Observe the industry performance: This is the basic mantra to be practiced before choosing any stock. An understanding of the macro-environment and observing industry trend lines would help eliminate certain sectors easily. For instance, the banking sector is expected to perform. So, an investor could watch out for well performing stocks in this sector. Sectors like services and manufacturing provide consistent dividends over a long period.
- Identify the rationale behind the dividend payout: Conventionally, it is the FMCG and MNC organisations that you would lay your eyes on if you were looking at high dividends. “The fundamental reason for this is that the promoters hold a large part of the parent company, which is an indicator of confidence,” said Gadodia. He cautioned, however, that of late, dividends from FMCG stocks have started to decline.
Don't look at one-off dividends, even though the amount may be high. In 2008-09, EID Parry had declared a 1,000 per cent dividend out of windfall profits through sale of investments, hardly a reflection of company performance.
Public sector undertakings, too, have a good history of dividend payouts. So, this would include certain banking and oil stocks.
| HIGH DIVIDEND YIELDING STOCKS | |
| Companies | Dividend yield |
| Indian Overseas Bank | 3.6 |
| Andhra Bank | 3.8 |
| Binani Cement | 4.3 |
| Yield calculated using CMP as on May 3,2010 | |
IN SHORT
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Analyst reports uploaded on the company websites normally provide a description of the company’s investment plans going forward.
The tables provide details of certain current high-dividend yield stocks and those stocks that have provided a consistent dividend.
