Investment strategy based on dividend yield: Unicon

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Investment strategy based on dividend yield: Unicon

Unicon Investment has come out with its report on investment strategy based on dividend yield.

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Hero Motocorp BSE | NSE 29/05/12 Are Mutual Funds betting on Hero Motocorp? Other Stocks in this news VST Industries | Oil and Natural Gas Corporation | Uflex | Gateway Distriparks |

Unicon Investment has come out with its report on investment strategy based on dividend yield.

High Dividend Yield would be one of the factors to select stock in the current scenario where market is at its low. High dividend yield becomes an important criteria for investment when stock prices are at two year low and short term scenario is uncertain. Dividend yield is simply the amount of dividends paid by the company, divided by the share price which is the clear cash return to the share holder.

Investors expect dividends to increase as business profits improve on the other hand, companies reduce dividend or eliminate dividends altogether, in response to economic recession and falling profits or during the expansion phase. High dividend yield indicates the financial strength and business safety of the company while low dividend yield in few cases is an indication of overvaluation. In addition to this, high dividend yield also counteract inflation risks associated with rising price levels and lost of purchasing power (economic fluctuation). We have used dividend-yield as a yardstick to pick few of the stock which could provide some protection against inflation and are potentially strong enough to participate in the market rally in the long term.

We are recommending the five stocks with high dividend yield ratio (~3.5% or more) which are considered to be fundamentally strong with, high level of cash, low debt to equity ratios, and strong balance sheet. Any one or in combination the following stocks could be added to your portfolio to get better overall returns.(dividend yield + capital appreciation).

Hero MotoCorp : The Company was amongst the out performer in the market with ROE of 60% in the last two years. Due to exit of technology partner HONDA the company has to raise debt for the payment else the company was having a low debt equity ratio of 0.2x compared to the current 0.5x. The company has dividend yield ratio of 6.6% which certifies the strength of the business model. With the rapid expansion in the domestic market the company is also planning to increase in dealer network across the globe. The company has PAT margin of 10%.

VST Industries : The company is in to Cigarette and tobacco business which comes under the FMCG sectors which have shown strong resistance to the market fall. The company has reputed brand like Charminar in its portfolio. The company has plenty of cash and maintained its consistency in paying out dividend to its investors with a dividend yield ratio of more than 6% since 2007. In addition to this the company is a totally debt free which provide further protection against the inflationary pressure. Company's PAT margin stood at 6.8% with a ROE of 38%. Dividend Payout ratio is at 74%.

Oil & Natural Gas Corp ( ONGC ): The company being the industry leader has maintained the dividend yield ratio of 3.5%. ONGC has debt equity ratio of 0.18x while maintaining a PAT margin of above 25% with ROE of 20%. Any positive development on the divestment plan could be key trigger for the company. 

Uflex : The company is in to packaging industry with a profit margin of 10% with a ROE of 29%. Company's Debt to Equity stood at 0.85x. With a market cap of INR 870 cr the company has a cash reserve of INR 278 cr. The company's dividend yield ratio stood at 5.22% with dividend payout ratio of 20%.

Gateway Distriparks : The company enjoy high profit margin of more than 45% continuously in the last three years on the back of its business model. The company is in to logistic sector which could have lot of potential once the FDI in Retail would be further liberalized. With a debt to equity ratio of 0.1x it has protection shield against the high interest rate regime. The current dividend yield ratio for the company is at 4.9% with a dividend pay out ratio of 76%.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment