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Top 5 Dividend Paying Stocks

Complete Your Portfolio With The Dividend-Paying Stocks

Many investors find themselves experiencing extreme emotional shifts, in step with the unpredictable rise and fall that come with stock market investing. Anxiety may hit like a tonne of bricks when prices fall, while excitement sets hearts racing with exhilaration when they rise.

With the domestic equity market witnessing a rollercoaster ride in the calendar year 2016, the year 2017 seems to be hazy and volatile and many investors have developed cold feet, unsure if they should put in their hard-earned money in the stocks now or wait for a better opportunity to enter the stock market. The upcoming events such as the Union Budget in February, the elections in Uttar Pradesh and Punjab, shift in the timeline for implementation of the GST are some of the major events which could have significant impact on the markets for some time and years ahead.

Apart from the domestic events, there are few major concerns like crude oil prices. The oil prices will be of interest to developing economies like India that are critically dependent on it for industrial production and transportation. In the past few years, oil has been trading at historic low levels. However, towards the end of 2016, OPEC and the non-OPEC members signed two separate deals to cut down production of oil so as to increase its price. Another meeting of OPEC members is scheduled in May. Hence, the movement in the price of oil will keep investors on the tenterhooks.

In such an unpredictable and volatile phase and when safe investment instruments such as fixed deposits are offering truncated interest on investments, the high dividend paying companies could be an investment option to be counted on. These companies tend to be consistent performers and could well turn out to be the best bets to put your money on for getting high returns. These high dividend yield stocks have lower volatility, which makes them a perfect fit for a portfolio in uncertain and volatile times. Investors who want regular returns and are slightly risk averse can go for such shares.

What is dividend?

When a publicly traded company earns a profit, the management generally has three choices:

1.       Reinvest the money in the company.

2.       Offer share buyback.

3.       Offer dividend to investors.

Usually, the fast growth companies will keep their profits and either reinvest them in the long-term growth of the company or offer a share buyback. A share buyback increases each investor’s future income by decreasing the number of outstanding shares of the company. Other companies may issue a dividend, or a share of the company’s profits, which is paid out to investors from time to time.

Successful investors keep dividend paying stocks in their portfolios

 

If you analyse at the portfolio of the most successful investor of all time Warren Buffet then you can find that all of the top holdings in his portfolio have large number of dividend paying stocks that have a record of high payouts of dividends and high yields.

Now that you know what dividends are, here are top reasons why champion investors are likely to keep dividend paying stocks in their portfolios:

1. Regular Income: “The only thing that gives me pleasure is to see my dividend coming in,’ said John D. Rockefeller. High growth rate is a priority for majority, but expert investors believe having a blend of high growth and dividend paying stocks helps them to have a more balanced portfolio. Dividend paying stocks provide a regular stream of income in the form of dividend payouts.

2. Dependable: These stocks become even more dependable when the stock markets are going through a bearish phase or uncertainty. Historically, the prices of dividend paying stocks are less volatile than other stocks. They have lower beta. An investor may not realise the benefit of less volatility when the market is stable, but when market is going through a period of downtrend, these stocks are the most dependable.

3. Consistency: The companies that offer dividends on a regular basis, indicate stability and willingness to share profit with their shareholders on an incremental basis. Public sector companies and large multinational companies in consumer goods and pharmaceuticals sectors are known to offer high dividends. Historical data on dividend pay-outs is important in the case of investors who are looking for consistency in dividend pay-outs when deciding between prospective stocks in to invest in, in case they are seeking income from dividends.

4. Reputation: A company that has paid say dividend of 1 per cent to its shareholders, would strive to keep up its reputation and pay at the same or a higher rate to its shareholders. A company that distributes dividends regularly is deemed to be financially sound firm with steady cash flows and stable stock prices. However, pay-outs that are too large can be an indicator that the company is more focused on short-term growth, which could be at the cost of long term growth.

5.Tax management: The dividends are tax-free in the hands of shareholders, though the company, which is paying out the dividend, has to pay a DDT or Dividend Distribution Tax. As per  the tax rules, a taxpayer who makes more than Rs 10 lakh in dividend income annually has to pay a 10 per cent dividend tax.

6. Re-Investment Strategy: Reinvesting dividend further increases the yield. People must invest systematically to accumulate dividend stocks. It is important to reinvest dividend that comes in. This additional money helps you to acquire extra stocks of dividend stocks. Increasing the number of stock means increase in the regular flow of income or more dividend income, which again helps you acquire more shares. It is said that ace investor Warren Buffet earns billion dollars alone in dividends.

Financial ratios associated with dividend paying stocks

There are only three primary ratios associated with dividend:

 

Dividend Yield: Dividend yield is the measure in the form of percentage of how much an investor has earned from the dividend he has received. The yield is the percentage of a stock’s market price a company returns in the form of dividend. For example, if a company pays an annual dividend of Rs 50 and the current market price of the company’s stock is quoting around Rs 1,000, then it has a dividend yield of 5 per cent.

Dividend yield is the best ratio to measure for dividend as compared to others because it takes current market price into account to calculate the returns. The formula is as follows: Dividend yield = (Annual dividend per share/Current market price of the stock) *100.

Dividend Percent: Dividend per cent ratio is the expression as a percentage of face value of the share. This ratio is useful to measure the trend of company’s dividend over a long period as it is calculated on a common base of constant face value. However, some corporate actions like stock split can break the trend.

Formula for calculating dividend per cent is as follows: D%= (Dividend received/Face value) * 100. Let us suppose a company declares 300 per cent dividend it means the company is going pay three times the face value of the equity shares. For example, if a company with a face value of Re 1 per share decides to distribute 300% as dividend, its shareholders will get Rs 3 per share for every share held, The formula is: D%= (3/1) *100= 300%.

Dividend Pay-out: The dividend pay-out ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, the ratio shows the portion of profits the company decides to keep to fund its operations and the portion of profits that it gives to its shareholders. Investors are particularly interested in the dividend pay-out ratio because they want to know if companies are paying out a reasonable portion of net income to investors.

How to calculate Dividend Pay-out: Following formula could be used to determine the Dividend Pay-out. DP= (Total Dividends/ Net Income) *100.

Conclusion:

 

A company that is paying high and consistent dividends is certainly an excellent company. This is a known fact to all of us. However, one should be wary of the fact that companies paying inconsistent, low or no dividends may or may not always be a worse company to invest in, as in the case with Berkshire Hathaway, one of the world’s costliest traded stock that has paid dividend only once ever since its listing in 1964. On the contrary, the company has delivered returns in excess of 7,50,000 per cent! Therefore, for a company to deliver healthy returns, the company needs to reinvest profits in its own business which Berkshire Hathaway has been successfully able to do and that has eventually contributed to its shareholder’s wealth.

However, if a company is paying good dividend to its shareholders and at the same time being able to maintain a healthy balance between pay-out ratio vis-à-vis company’s ability to reinvest its generated profits into business to grow further and add value to shareholders’ capital, it should be considered a good company to invest in. It is usually seen that dividend yielding stocks typically do not witness significant upmoves or downfalls, offering some cushion against market volatility. Additionally, these are typically cash-rich companies that pay dividend once or even twice every year.

On the other hand, an investor should also be careful of companies that are paying high dividends but do not hold promise in terms of future growth. Therefore, any company that lacks future growth prospects means that the company does not have the potential to give returns in terms of capital appreciation. Therefore, slowly and gradually this company will face the prospect of deteriorating cash balance, thereby bringing down the divided outgo.

We, at DSIJ, advise all our esteemed readers and clients to invest in fundamentally strong companies having strong business, good management and visibility in terms of growth trajectory. The trend in profits is important, especially to gauge if there is any prolonged slowdown in the same, as it could mean that the company might not be able to pay similar dividends in future. Factors such as the industry the company operates in, its growth potential, products substitutes that could be potential threats to a company's products/services, etc. need to be considered while putting one’s money into stocks.

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EXPERTS TAKE

Make Your Choice For A Right Dividend-Paying One

Abhijeet Dey - Sr. Fund Manager-Equities, BNP Paribas Mutual Fund

It is usually seen that high dividend paying stocks and sectors generally trade at top of their valuation. Can you please help us understand this better? 

This is not true necessarily. There are many stocks in the chemical and metal sectors that were (and some still are) trading at low PEs for a long time. I do not think there is any correlation between valuations and dividend yield.

Are high quality dividend yield stocks meant for any particular type of investors or can be equally beneficial for every investor? 

High dividend yield stocks can be beneficial for all kinds of investors. However, if any investor is looking for consistent cash flows from his/her investments then investing in high dividend yield stocks can be considered as a good idea. However, post the recent changes in the tax laws, a buyback is proving to be a better option for investors earning more than Rs.10 Lakhs as dividend. 

With expectations from government that they will lower corporate tax rates, one of the biggest beneficiary would be the companies paying healthy dividends to shareholders. What is your take on this? 

If corporate tax rates go down as has been announced by this government, we should see some companies increasing their dividend payouts. But this will be only true for tax paying companies (34%). 

What type of companies can afford to distribute high dividends consistently year after year?

Ans. We believe that companies with a lower capex spend, low debt and low working capital requirement are in an ideal position to give high dividends. Alternately, if a company is moving into a position of generating higher free cash flows it can also convert this into higher dividends. 

In today’s market, there may be many stocks paying high dividend yield. So what according to you will be the best way to identify good quality sustainable dividend paying stocks?

We believe that companies with 1) a business which is growing faster than the industry and industry growing faster than the GDP, 2) A sustainable moat around the business, 3) low capex or working capital needs, 4) low debt and 5) shareholder friendly management can sustainably pay higher dividends.

OMCs Can Be An Intelligent Bet 

Sachin Relekar - Fund Manager Equity, LIC Mutual Fund

Do you think the downward trending interest rate environment in the country will force millions of investors into equity markets, especially those paying good dividends? 

 

Declining interest rates make dividend yield a very attractive proposition. Along with this, value of earning yield (earning/ price) also improves, and therefore it can drive the share price also up, given the other things are constant. For more participation of retail investors into equity markets in a sustainable manner, financial savings should go up in the economy. For this, real interest rates should remain attractive for a longer period of time. Our experience suggests, investors see equity from a growth or capital gains perspective and not from an annuity earning perspective. Though some investors may favour dividend as an annuity income generating stream, such a large shift is too early to call for.

With valuations coming down from their recent peaks and interest rates going down in India, what are your views on highyield dividend paying stocks? 

Higher dividend yield stocks have been very resilient in recent market correction as higher yield provides a cushioning effect to downside. It is important to consider the underlying business strength of the company so that sustainability of dividend income can be estimated. If the fundamentals of the business deteriorate or the stock gets de-rated for some reason, higher dividend yield might be offset by negative capital gains. However, high dividend yield always will remain an important attribute of the equity investment.

Are high yielding dividend stocks a good substitute for fixed income investments during times of falling interest rates?

During the falling interest rates, bond prices run up a lot, however, the reinvestment risk for the coupon goes up. Nevertheless, riskiness of principal is comparably low versus equity investments. Therefore, if an investor is looking for substituting high dividend yield stocks for fixed income investment, s/he should look for very safe businesses, typically regulated entities with highly predictable cash flows, available at reasonable valuations. The risk appetite of a fixed investment investor is considered to be lower than a equity investor, and so two asset classes are not fungible easily. 

Which according to you are the high yielding sectors with good pay-out ratio and at the same time can see capital appreciation? 

If one scans the universe of BSE 200 companies, high dividend paying companies come from various sectors, namely, Mining, OMCs, energy utilities, financials and some technology companies. Some of these companies have maintained a high dividend yield, and at the same time have delivered very high capital appreciation also. However, not every company has done that. Difference is that some of the names have seen business fundamentals improving meaningfully. We are positive on the sectors which are highlighted above. However, our approach to investment is company specific or bottoms-up. 

What are the major risks associated with high dividend paying companies?

As highlighted above, major risk comes from the deterioration in the business fundamentals and de-rating of the stock. In such a situation, loss in capital value will offset the dividend yield. Other risk is companies might change the dividend policy, eventually resulting in a negative surprise for the investors. To summarise, dividend yield and dividend payout policy of the company are important factors in equity investment. However, it should not be considered in isolation. Overall financial performance, business fundamentals, competitive landscape, regulation and management should be taken into account.

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When It Comes To Earning The Pink, Pick The Bluechips

Hiren Dhakan - Associate Fund Manager, Bonanza Portfolio

Are High quality dividend yield stocks meant for any particular type of investors or can be equally beneficial for every investor? 

High dividend paying stocks are usually largecaps which are usually market leaders in the respective sectors. So these funds would not show extra-ordinary growth or extra-ordinary corrections unless and until there is a very particular reason related to that very stock. These facts make the high-dividend paying stocks suitable for ones looking for relatively lower volatility in equity investments along with regular income in the form of dividends. These funds may not be that alluring for investors looking for high capital growth. 

What type of companies can afford to distribute high dividends consistently year after year? 

High dividend paying stocks are usually those that have already grown substantially in the past and are in the stable-stage of their business where they are having decent growth in business year-on-year, regular cash flows and are enjoying market leadership. High growing stocks would not pay regular/high dividends as these companies usually invest their surplus in expansion/ improvising in order to increase their market share and profits. 

In today’s market, there may be many stocks paying high dividend yield. So what according to you will be the best way to identify good quality sustainable dividend paying stocks? 

Look for largecaps and bluechips. Look for companies that have steady cash flows. You may also find an easy list with highest dividend yielding stocks on the web. By virtue, choose stocks that have pricing power. High dividend paying stocks enjoy the freedom to price their products with limited constraints from their competition’s prices.

For risk-averse investors, dividend paying companies are the best option

Prashasta Seth, CIO, Equity, IIFL Asset Management Company

What are dividend paying stocks?

 

Stocks which distribute a part of their profits earned to shareholders on a regular basis are dividend paying stocks. Dividends can be distributed either quarterly, half yearly or annually. Companies with low capex requirements typically fully distribute profits (high dividend pay-out) while capital-intensive businesses retain profits to a great extent (low dividend pay-out).

History suggests that high dividend paying stocks outperform the market in the long run. What are your views on it?

Payment of dividend by a company is perceived positively by the market as it provides fungibility of the cash to a minority investor. It is not necessary that high dividend paying stock will always outperform the market. But the probability of outperformance definitely increases as dividend paying companies are typically the ones with robust businesses and grow higher than the GDP. Also, the corporate governance is much better in dividend paying companies, in general.

How important is dividend income for a long term investor, apart from the capital appreciation which comes along with it?

 

Dividend income is a passive income earned by an investor over the long term. Thus, for a risk-averse investor who intends to achieve capital appreciation along with fixed return on invested capital every year, steady dividend paying companies are the best option. But it should be kept in mind that over the long term, high dividend paying companies will definitely underperform high growth companies.

Is there a correlation between high dividend paying companies and capital appreciation in their respective stock prices?

 

The main reason companies pay dividend is because management cannot find better growth opportunities within its own company to invest its retained earnings. Thus, it is implied that high dividend paying stocks are the ones which typically will perform better only when there is an uptick in the economy and may not perform in a subdued environment, though they will maintain the dividend yield in any scenario. Thus, the capital appreciation in a high dividend yield company might be mediocre, as compared to a high growth company in a niche segment.

For an investor, is there any need to be suspicious about companies which are paying high dividends, but may lack future growth prospects?

Typically, a high dividend paying company has its business closely linked to the GDP growth of the country. Also, the companies having high pay-out ratio have clean balance sheets and have good corporate governance practices. Thus, there is no need to be suspicious even if a company distributes 100 per cent of its profit as dividend for lack of better business prospects inside the company. Also, there are companies, which don’t need to retain earnings for growth (e.g. FMCG companies). Thus, an investor should evaluate companies not only on the basis of dividend paid, but also by taking future growth prospects into consideration. A high ROCE, low capex company would provide best returns for a long term investor in the form of dividend pay-outs as well as capital appreciation.

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High Dividend Yield Stock Recommendations

One sound long term investing strategy is to buy stocks that offer high dividend yields. This strategy has become particularly enticing in today's downward trending interest rate scenario, since it offers investors a chance to generate a lot of income from their portfolios. However, just because a stock offers a high yield does not make it an automatic buy, especially since high yields are often accompanied by high risks associated with the respective companies. 

If you are looking for solid income from dividend stocks, look no further. We, at DSIJ, have selected a group of stocks that tick all the boxes in terms of performance metrics, along with great future prospects in terms of growth. We believe these are the best income stocks in the market right now.

These dividend cash cows are certainly going to add value to one’s portfolio of investments in the future.

Clariant Chemicals (India)

BSE Code: 506390

FV: 10

CMP: 731.50

Market Cap (FF): Rs 607.84 crore

Clariant Chemicals (India) is a wholly-owned subsidiary of globally leading specialty chemicals company Clariant, which is based in Switzerland. The company has a range of products in two business segments: pigments and colours, and dyes and specialty chemicals.

The company is one of our top picks when it comes to paying dividend to shareholders. The company is paying very high dividends and its dividend yield ranges between 10.60 per cent to 25.22 per cent over the last five years. The capital appreciation given by the stock is a secondary benefit.

The company has rewarded its shareholders on a consistent basis, which can be gauged by the dividend pay-out ratio of the company over the past years.

Therefore, an investor will be making money by investing in Clariant Chemicals by virtue of dividend income, ignoring the capital appreciation gains which will come with strong financial performance.

On the financial front, the company recorded sales of Rs 512.9 crore in H1FY2016-17, registering a growth of 6.5 per cent as compared to the same period in the previous year. The sales for the continued businesses (plastics and coatings segment) grew by 13.9 per cent in H1 2016-17. The profit from operations in H1FY2016-17 stood at Rs 21.9 crore.

The company is maintaining its sustainable growth targets in its core businesses with better raw material management and by targeting new customers and introducing innovative products. Clariant Chemicals has been aggressively pursuing acquisitions to expand its footprint globally.

NMDC

BSE Code: 526371

FV: 1

CMP: 146

Market Cap (FF): Rs 9225.90 crore

Incorporated in 1958, NMDC is fully owned by the Government of India and comes under the administrative control of the Ministry of Steel. NMDC is an exploration behemoth with activity ranging from minerals, including iron ore, copper, rock phosphate, lime stone, diamond, tin etc. The mining major has been bestowed with the status of "Navratna" amongst the public-sector enterprise. NMDC is India's single largest iron ore producer, presently producing about 30 million tonnes of iron ore.

NMDC has been consistently making profits and paying dividends over the years, which is evident from the fact that companies dividend yield has been on an upward trajectory over the past five years from the low of 2.79 per cent in 2012 to touching a high of 11.23 per cent in the year 2016, indicating the robust nature of dividend income which the shareholders have enjoyed.

The company has maintained a dividend pay-out ratio of close to 50 per cent on a consistent basis and, at the same time, it has been reinvesting its profits back into the company, which gives the company better future prospects in terms of profitability and the consequent capital appreciation.

Looking at the financials, NMDC’s turnover for H1FY2016-17 remained more or less flat at Rs 3,460 crore, as against Rs 3,409 crore in the previous fiscal. The reduction in sales were primarily due to fall in the domestic prices of iron ores. Operationally too the company suffered as its operational profit decreased by 20 per cent. The PAT also reduced by 19 per cent in H1FY2016-17 to Rs 1482 crore as compared to Rs 1832 during the same period in the last fiscal.

Rural Electrification Corporation

BSE Code: 532955

FV: 10

CMP: 138.55

Market Cap (FF): Rs 10,671.37 crore

Rural Electrification Corporation (REC), a listed ‘Navratna’ public sector enterprise under the Ministry of Power, Government of India, was incorporated on July 25, 1969. REC is a non-banking finance company with the main objective of financing and promoting power sector projects all over the country. REC provides loan assistance to various state power utilities, private sector project developers, central power sector utilities and state governments for investments in power generation, transmission, distribution and other system improvement schemes/initiatives.

REC’s performance stands out when it comes to rewarding its shareholders by way of dividends. The company over the past five years has been able to double its profits from around Rs 2,800 crore in 2012 to Rs 5,600 crore in 2016, which has been exemplary given all the problems that the economy went through during the period. The dividend yield of REC has been on an upswing, ranging from 3.65 per cent in 2012 to 10.30 per cent in 2016.

REC has maintained a stable pay-out ratio in the range of 20-30 per cent which has been fruitful to the investor community as it gives stakeholders visibility in terms of dividend earnings in addition to capital appreciation.

The company has been performing well financially. REC’s Q2FY17 profits were up 8 per cent at Rs 1,751 crore. Its total Income has increased from Rs 5,924 crore for the quarter ended September 30, 2015 to Rs 6,108.6 crore for the quarter ended September 30, 2016. REC’s restructured book has had no new loan additions during the quarter. The company has not added any new non-performing assets (NPAs) in Q2.

As at the financial ending March 31, 2016, REC had a loan book of over Rs 2,00,000 crore.

NHPC

BSE Code: 533098

FV: 10

CMP: 30

Market Cap (FF): Rs 5140.48 crore

NHPC is a Government of India Enterprise, which was incorporated in the year 1975 with an objective to plan, promote and organise an integrated and efficient development of hydro-electric power in all aspects in the country. At present, NHPC is a Mini Ratna category-I enterprise of the government.

NHPC has been successfully paying good dividends to the shareholders which can be seen from the rising dividend yields for the company. The yields touched a five-year high of 6.22 per cent in FY16, rising from 2 to 3 per cent in the prior years. Dividend pay-out ratio has also hovered around 30 per cent with the rest being reinvested in the business.

Financially, the company has been doing fine, as NHPC reported an increase in its income from operations by close to 5 per cent in FY16 to Rs 8627.84 crore, as against Rs 8244.07 crore in FY15. Its operational performance remained flat with a negative bias during the period, weighed down by an increase in other expenses. The margin also remained under pressure in FY16. Profits for the year saw an increase of 7.9 per cent at Rs 2688, as compared to Rs 2491.36 crore in FY15.

Presently, NHPC is engaged in the construction of five projects aggregating to a total installed capacity of 4290 MW, of which many are being executed through a JV company. The company’s 10 projects of 7151 MW are awaiting clearances/government approval for implementation, including three JV projects.

Sasken Communication Technologies

BSE Code: 532663

FV: 10

CMP: 402

Market Cap (FF): Rs 420.64 crore

Sasken is a leader in providing product engineering and digital transformation services to global tier-1 customers. Sasken’s deep domain knowledge and expertise have helped the company maintain market leadership in industries such as semi-conductors, automotive, industrials, etc. Additionally, this company deals in business of product engineering and digital transformation services 

Sasken Communications is among the few companies in the market having a dividend yield over 10 per cent. The company’s dividend yield has been ranging from 6 to 17 per cent. Over the last three years, the dividend yield has been on a decline from its high of 17 per cent, even though reward in terms of dividend income has been pretty solid.

The company has rewarded its shareholders on a consistent basis, which can be gauged by the dividend pay-out ratio of the company over the past years. The dividend pay-out has been over 25 per cent in any given year since FY12 to FY16.

On the financial front, Sasken reported a 1.3 per cent increase in YoY revenue at Rs 240.17 crore in the first half of FY 2017, as compared to the same period in the previous fiscal. The consolidated revenue for Q2 of FY2017 at Rs 118.40 crore dipped 2.8 per cent sequentially over the previous quarter.

The company’s client profile looks attractive with the likes of Intel, Qualcomm, British Telecom, Honeywell, Sony, Inmarsat etc. being prominent clients contributing more than 50 per cent to its revenues.

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