Dividend-paying stocks make an ideal portfolio play especially in times of crisis. These stocks tend to absorb the volatility and remain relatively stronger in such a scenario
After hitting a high on August 28, market has been grappling with volatility with S&P BSE Sensex seeing a steep fall of over 4,000 points, or little over 10 percent.
And, if experts are to be believed, the volatility is not over yet and we could see a retest of support levels in near future or at least before the general elections in 2019.
Dividend-paying stocks make an ideal portfolio play in such times of crisis. These stocks tend to absorb the volatility and remain relatively stronger in such a scenario, but at the same time, they are low-return stocks.
“Change in portfolio strategy is not warranted but in a volatile market, investors can deploy short-term strategy with a view of safeguarding long-term objective of the portfolio. Keeping this view, it is prudent to allocate not more than 15-20 percent of overall portfolio to high dividend paying stocks having a well-established business,” Dinesh Rohira, Founder & CEO, 5nance.com told Moneycontrol.
“Although it will potentially provide investors with tangible returns, irrespective of market condition, a payout is not always assured or guaranteed. Thus, if investors have a long-term view coupled with stocks backed by strong fundamentals having a growth potential in the portfolio, a short-term event should not concern objective,” he said.
In a strong equity market, where stocks have delivered good capital appreciation, investors may not have paid attention to dividends. But, when investors face the heat of a sell-off, these stocks usually come back in favour.
If we take re-invested dividends into account, at a time when Sensex rose at a 12.6 percent CAGR over the last 5 years, total shareholder returns over the same period were 14.1 percent CAGR, according to a report by Karvy Stock Broking.
“This adds up over time — an investment of Rs 100 made 20 years ago would be worth Rs 1,250, with reinvested dividends, the value of the investment would be Rs. 1,735. Investing in stocks with healthy dividend yields and high dividend payouts is a stable form of investing,” it added.
In the current economy, where bank fixed deposits offer interest rates to the tune of 6-7%, investing in stocks with a good investment yield is good. “We recommend that investors consider adding high dividend yield stocks to their portfolio to bring in regular inflows. We offer a list of 10 stocks with high yields,” said the Karvy report.
Dividend-paying stocks have two basis components – Dividend payout ratio and dividend yield.
Dividend Payout ratio is basically how much money a company is willing to give back to its shareholders from its net profit.
“Investors should also pay attention to the amount the company wants to use for reinvesting in the business, paying off the debt and transferring it to reserves. For example:- if a company has incurred a profit of Rs 1,000 million during a year and it is paying Rs 400 million as dividends then its dividend payout ratio is 40%,” Rahul Sharma, Sr. Technical Research Analyst, Equity99 told Moneycontrol.
On the other hand, when we look at dividend yield it tries to gauge the return on an investment. It can be measures as high yield stock and low yield stock.
“High yield would be something like ITC which gives a significant part of earnings and act as an income stock. While low yield will be those that are giving less dividend and investing most part back into expansion and to improve the bottomline and topline,” Mustafa Nadee, CEO, Epic Research.
“If you are willing to take the risk, one should consider high dividend payout coupled with low yield for a growth as a function. If you are conservative in approach one should look at high yield and high dividend payout ratio,” he said.
Here is a list of 10 stocks identified by Karvy Stock Broking. The brokerage firm has considered the stability of dividends while looking for stocks with high forecast dividend yield:
General Insurance Corp of India: Dividend per share 8.6| Payout: 37.2%
GICRE was incorporated in November 1972 as a part of Government of India’s (GoI) move to nationalise the general insurance business. The majority is owned by GoI and is the dominant Indian reinsurer.
GICRE is present in various segments of reinsurance of which major segments are fire, health, motor, agriculture, marine, aviation, and engineering. The Indian reinsurance market, estimated to be around Rs 388 billion, has witnessed compounded annual growth rate (CAGR) of 15 percent in the past 10 years.
Graphite India: Dividend per share 44| Dividend Payout Ratio: 29.7%
Graphite India (GIL) is the leading graphite electrode manufacturer in the domestic market, and along with its German subsidiary, Cova, as on date, is the fourth largest non-Chinese electrode manufacturer globally with a combined manufacturing capacity of 98,000 tonnes per annum (tpa).
The company’s overall financial profile continues to remain strong as a result of its highly conservative capital structure and strong liquidity profile.
India Oil Corporation: Dividend Per Share: 9.3| Dividend Payout Ratio: 42.6%
Indian Oil Corporation is a state-owned Maharatna company founded in 1959 and is engaged primarily in exploration and production of crude oil, natural gas & petrochemicals, refining, pipeline transportation and marketing of petroleum products.
The company plans to double the number of retail outlets over the next three years from 27,000 to 52,000, IOC will continue to be the nation’s largest fuel retailer.
Infosys: Dividend Per Share: 21.8| Dividend Payout Ratio: 52.5%
Infosys has a track record of consistent dividend payment with a dividend payout CAGR of 33 percent. Infosys’ dividend payout ratio for FY18 is 48 percent. For FY19 we expect revenue from Digital services which is a high margin business, to be higher.
Given Infosys stated capital allocation policy to return 70 percent of Free Cash Flow (Rs. 10.4 bn set aside for FY19), improved profitability due to currency tailwinds and higher Digital revenues in FY20, we expect Infosys to maintain a dividend yield of over 3 percent in the future.
ITC: Dividend Per Share: 7| Dividend Payout Ratio: 61.1%
ITC Ltd is one of India’s foremost diversiﬁed businesses and a market leader in cigarettes in India. At present, ITC has more than 4.5 Mn sq.ft of warehousing space and it has more than 200 factories.
ITC Foods is the 3rd largest and fastest growing segment, and ITC hotels are one of the fastest growing hospitality chains in India. During the last 5 years, ITC’s revenue grew by 5.4 percent CAGR to Rs. 431.2 Bn, profits grew by 6.1 percent CAGR to Rs. 112.7 bn and RoE was above 22 percent.
Manappuram Finance: Dividend Per Share: 3.2| Dividend Payout Ratio: 27.6%
Manappuram Finance (MFL) was incorporated in 1992. It mainly focuses on utilizing surplus capital to build or acquire new lending products relevant to the existing retail customer base.
MFL’s total AUM has grown from Rs. 75.5 Bn in FY11 to Rs. 158 Bn in FY18 at a CAGR of 10 percent. Its standalone Capital Adequacy Ratio in FY18 stood at 27 percent. MFL recorded a net interest income (NII) of Rs. 23,957 million and the net profit of Rs 6,709 million in FY18 with a CAGR of 17 percent and 24 percent respectively over the last 5 years. MFL has been distributing consistent dividends to its shareholders.
NHPC: Dividend Per Share: 1.7| Dividend Payout Ratio 57%
NHPC is India’s largest hydropower generating company. It is a Mini-ratna Category I enterprise (the GoI owns 73.96%). The company has an installed capacity base of 5,451 MW across 18 hydropower stations.
NHPC has a target of setting up 430MW renewable capacity (380MW solar, 50MW wind) over FY17-20. NHPC has also obtained category-I inter-state power trading license from CERC in the month of April 2018 to tap the opportunities available in the business of power trading.
South Indian Bank: Dividend Per Share: 0.6| Dividend Payout Ratio: 15.1%
South Indian Bank is a private sector bank that was founded in the year 1929 and is headquartered in Thrissur, Kerala. South Indian Bank Limited provides retail and corporate banking, para banking activities such as debit card, third-party product distribution in addition to Treasury and Foreign Exchange Business.
Sun TV Network: Dividend Per Share: 22.1| Dividend Payout Ration 51.8%
Sun TV Network Ltd is into broadcasting services. It is engaged in broadcasting satellite television in South India. It operates in 4 South Indian languages with viewers in Sri Lanka, Singapore, Malaysia, United Kingdom, Europe, Middle East, United States, Australia, South Africa, and Canada.
It is also into FM radio broadcasting (45 FM Radio Stations) spread across Chennai, Coimbatore, and Tirunelveli. Sun Group also has 3 Daily Newspapers and 6 Magazines. Sun Direct, one of the largest DTH service providers in India has more than 9 Mn subscribers.
Vedanta: Dividend Per Share: Rs 13.3| Dividend Payout Ratio 39.5%
Vedanta Limited is a globally diversified Vedanta Group Company with low-cost operations across zinc, copper, lead, aluminium, silver, iron ore, oil & gas, and power. The business spans across India, South Africa, Namibia, Ireland, and Australia. It is the largest private sector oil and gas producer in India producing 25 percent of India’s crude oil.
It has the largest aluminium capacity of 2.3 MTPA in India and operates through Balco and enjoys a 40 percent market share. The company has iron ore mine reserves of 100 MT with a life of 20 years and is the largest private sector exporter of iron ore in India.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.