High Dividend-Paying Stock: The Anchor in Turbulent Times!

High dividend-paying stocks are most sought after by investors looking for regular income. Tanay Loya finds out some interesting aspect on dividend paying stocks.

Equity as an asset class is considered inherently volatile. The objective for any long-term investor is to maximise the return for the given level of risk. In other words, the whole equity game is to maximise risk-adjusted returns over a given period. This is exactly where the 'dividend-yield stocks' come into picture. Dividend yield stocks not only contribute in the form of regular income, but also display low volatility, which can be a useful characteristic in a stock. Says Uttam Jain who has been into markets for more than two decades, "I find investing in dividend paying stocks comfortable as they don't jump up and down as several other non-dividend paying stocks do, be it large-cap or mid-cap. Not to forget the cash flow that I generate from dividend income. It helps." High dividend paying stocks are considered less volatile and provide the much-required regular income, thus contributing to the total return component of any stock. While the benefits of including the high dividend-paying stocks in the portfolio are known, one needs to be careful in identifying such high dividend-paying stocks, since not all the high dividend paying stocks have proven to be productive. 

How do we identify a good dividend-paying stock? 

The basic principles of identifying a good stocks can be applied when identifying a good dividend-paying stock as well. While identifying dividend-paying stocks, one needs to scan for those stocks that are reflecting rising dividend payout ratio, which often gives insight on the stability of the company.If a company has a history of consistently paying dividend where it is observed that there is a steady increase in the dividend payout ratio, it indicates that the company management is able to deliver on revenue growth and income growth front and is willing to share the profits with the shareholders on a regular basis. One needs to also separately identify those companies which have distributed one-time high dividends owing to extraordinary performance in a particular season or due to some windfall gains. 

A. Promoter holdings and dividend behaviour 

We find that companies where the promoter holding is high have a tendency to distribute higher dividends. For a sample data of 127 companies, where the promoter holding is more than 50 per cent and the average dividend yield is higher than 2 per cent, we find that the average returns delivered in the past one year is 28.23 per cent (* data as on April 3, 2018). Thus, the average performance of these stocks reflects outperformance by almost 17 per cent when compared to Sensex. During a similar time frame, BSE 500 has gained nearly 11.20 per cent. 

B . EPS growth vs DPS growth 

Further, we studied the performance of the constituents of BSE 500 whose earnings per share (EPS) growth is higher than dividend per share (DPS) growth and also for those companies whose DPS growth is higher than the EPS growth. 

We find that out of the 500 companies, there are 192 companies which had greater DPS growth than EPS growth over the previous five years. The average annualised returns for these 192 companies whose DPS growth is greater than EPS growth is 20 per cent. Out of these 192 companies, there are 158 companies that delivered positive annualised returns and there are at least 97 companies that have given returns above 16 per cent on an annualised basis. The BSE Sensex in a similar time frame has delivered 16 per cent. Thus, we can say that almost 50 per cent of those companies within BSE 500 index that have reflected higher DPS growth over EPS growth in previous five years have managed to beat Sensex returns . For those set of companies that have reflected higher EPS growth as compared to DPS growth over the past five years within the BSE 500 constituents, the observations are interesting and point towards out performance.

LTCG can deter investors from investing in capital gain stocks From April 1, 2018, the government decided to reintroduce the Long Term Capital Gains (LTCG) tax at 10%. This will make investors decide on whether to go for capital gains that will reduce their returns on their investments or go for dividend paying stocks, the income from which can be reinvested in other assets. Even though dividends are taxed at 10%, dividend below Rs.10 lakh are not taxed. So high net worth investors can choose a hybrid option receiving dividends around Rs.10 lakh and invest the remaining amount in stocks that provide them capital gains.

Out of the total 500 stocks, we find that there are 214 stocks that have delivered EPS growth higher than DPS growth over the five-year period and the average return for these stocks is nearly 32 per cent on an annualised basis. Out of these 214 stocks, there were 200 stocks that managed to deliver positive annualised returns even as the number of such stocks that managed to beat Sensex stood at 152. We can say that almost 71 per cent of those stocks that are constituents of BSE 500 and have delivered higher EPS growth than DPS growth have managed to beat Sensex returns over the five-year period. 

So, it can be said that companies that have higher EPS growth than DPS growth have a higher probability of outperforming benchmark indices. This is evident from the fact that companies which distribute lower dividends invest their retained earnings in more profitable venture, thereby increasing the firm's value and share price. 

Mature Companies Tend To Have Higher Dividend Payouts 

"The amount of dividend a company pays depends on the business stage of the company. During initial phase (growth phase), companies tend to have negative cash flows from operations, thereby limiting their ability to pay dividends. Mature companies have high cash flows and tend to give out high dividends to keep their investors happy. Adding to the above factors, the non-availability of profitable reinvestment opportunities can compel companies to distribute excess cash in the form of dividends. This can be judged by the amount a company spends in its capital expenditure and working capital requirements. Low capital expenditure and working capital requirements leave companies with higher net incomes, thereby increasing the amount they can distribute as dividends." 

 High dividend does not always mean good stocks 

While choosing high dividend yield stocks, it is common for investors to give higher preference for those stocks that distribute higher dividends. One must ignore those companies for investments that have declared negative income or losses and are distributing dividends. There are several companies that have paid dividend to their shareholders even after having a negative PAT. Investors should be cautious about such companies as these dividend payments could be one-time event and do not ensure future income through dividends. Some of the examples of such companies last year are State Bank of India, Kirloskar Brothers Ltd, Bal Pharma Ltd, Tata Power Company Ltd and Tata Communications Ltd. 

Conclusion 

While it is advisable to look positively at high dividend-paying stocks, the process of identifying dividend-paying stocks is more important and will often determine the outcome. It is recommended that investors focus on those dividend-paying companies that have shown a steady EPS growth over the last five year period or more and are distributing dividends consistently even while reflecting growth in dividends, albeit less than EPS growth. The chances of such stocks outperforming the benchmark returns is very high and the beauty of including such stocks in your portfolio is attaining a blend of capital growth and dividend yield, which is a rare combination.

While constructing a portfolio around dividend-yield stocks, investors can also focus on those stocks that have more than 50 per cent promoter shareholding. The fundamentally sound stocks with promoter shareholding of more than 50 per cent may provide ample opportunity to identify high quality dividend yielding stock that can generate alpha returns.

These are the two high dividend paying stocks that can be a part of your portfolio

SJVN
CMP : Rs.34.30
BSE CODE : 533206
Face Value : Rs.10
BSE Volume : 36,529 

Sutlej Jal Vidyut Nigam (SJVN), a mini Navratna Public undertaking, is a joint venture between Government of India and Government of Himachal Pradesh. Besides executing projects in Himachal Pradesh, SJVN is presently executing projects in Nepal, Bhutan, Uttarakhand, Bihar and Gujarat. The company has already diversified into wind power, thermal power and power transmission. 

During FY18, the company exceeded the Ministry of Power's target for the company to generate 8,950 million units of electricity by generating about 9015 million units. On the financial front, the company reported de-growth in revenue for Q3FY18. The company's revenue fell by 11.9 per cent YoY to Rs.436.6 crore. The EBITDA for the quarter decreased 22 per cent YoY to Rs.299.6 crore, whereas its EBIDTA margin fell by 896 bps YoY to 68.6 per cent. The company's net profit decreased 21.2 per cent YoY to Rs.205.7 crore for the quarter under consideration. The gross power generation for the quarter stood at 1,280.8 million units for hydro power, 4.53 million units for wind power and 2.14 million units for solar power. 

The company recently laid the foundation stone for its 60-MW Naitwar Mori hydro project which has the potential to generate 265.5 million units of electricity per year. In addition to this, by April-end, the company is going to start the construction of 900 MW Arun III hydropower project in Nepal to expand its capacity. SJVN is currently trading at a PE multiple of 9.59x. The company has a debt-to-equity ratio of 0.21x. The stock is trading at 1.05 times its book value. SJVN is providing a good dividend yield of 8.64 per cent and has also been maintaining a healthy dividend payout of 43.80 per cent. We recommend a BUY on the stock.

MOIL
CMP : Rs.211.15
BSE CODE : 533286 
Face Value : Rs.10
BSE Volume : 20,828 

MOIL, a mini Ratna company, is the country's largest producer of manganese ore, accounting for about 50 per cent of the India's total output. The mines of the company are strategically located, providing a competitive advantage to the company. Currently, MOIL operates 10 mines, of which six are in Maharashtra and four are in Madhya Pradesh. 

The company registered a revenue of over Rs.1,300 crore for FY18, representing a rise of about 31 per cent YoY. This is the highest-ever revenue in the company's history. The company has also reported production of about 1.2 million tonnes of manganese ore, its highest in the last 10 years. The company also recorded its highest-ever production and sales of non-fines manganese ore during FY18. 

In Q3FY18, the company reported 15.62 per cent decrease in net sales to Rs.299.8 crore, as compared to Rs.355.3 crore during the same period last year. The company's PBDT remained flat at Rs.170.28 crore in Q3FY18. The company has posted 2.34 per cent increase in its net profit to Rs.103.79 crore in Q3FY18 as against Rs.101.42 crore in Q3FY17. The company has set a production target of 2 MT by FY21 and 2.5 MT by FY25. The company is undertaking various mine development and expansion projects at Balaghat and Gumgaon mines for a total capex of about Rs.460 crore. The company is also setting up ferro alloy plants with a total capacity of 75,000 MT at Balaghat and Gumgaon mines with a total investment of about Rs.419 crore. MOIL has a PE ratio of 12.88x. The company is virtually debt-free with almost no long-term loans on its balance sheet. The company has been maintaining a healthy dividend payout of 41.17 per cent. We recommend our reader-investors to BUY the stock..