They may not give multibaggers return but are ‘Defensive Bets’; Top 15 dividend paying stocks

Finding value is hard especially in a market which is trading at valuations most market analysts consider ‘not cheap’ or more towards expensive. Most of the stocks are already trading at valuations which are above long-term averages.

When constructing portfolio investors should always have a balanced approach. Although most investors prefer stocks which can give capital appreciation or multibaggers returns but seasoned investors prefer dividend-paying stocks which are defensive in nature.

Remember, capital appreciation may or may not happen but the certainty of dividend income is far higher than price growth. But, in equity markets, nothing can be safe hence these stocks can be at best called defensive plays.

Top dividend paying stocks with highest payout ratio include companies like Hindustan Zinc, Coal India, REC, InterGlobe Aviation, Castrol India, Bajaj Corp, Infosys, HCL Technologies, VST Industries, Hero MotoCorp etc. among others according to a report by IDBI Capital.

In the top 15 stocks, 10 stocks gave positive returns with gains up to 95 percent while 5 out of 15 stocks gave negative returns with losses up to 10 percent.

Hence, high dividend paying stocks might not rally as much as investors want them to rally but are relatively stable when markets start to head south.

“Dividend-paying stocks are a source of passive income which usually comes from defensive stocks rather than a growth stock. Since investment cannot be termed as ‘safe’ in the capital market, it rather plays as a defensive stock in the portfolio,” Dinesh Rohira, Founder & CEO, 5nance.com told Moneycontrol.

“Further high dividend yield stocks tend to fall less than growth stocks during a downturn in the market. Besides company tend to play safe by declaring dividend even during the tough economic conditions to avoid negative sentiment in the market,” he said.

Dividend income is the best form of passive income which maintains continuity of cash flows. Before we go further, let’s first understand what is dividend income?

A dividend payment is a process through which the company shares or distributes its profit with shareholders. The dividend is always calculated on the face value of the share and is exempt from tax.

A dividend is chargeable to tax at the rate of 10% if the aggregate amount of dividend received from the domestic company is more than Rs10 lakh.

“Since Budget 2016, the scenario has changed for dividend taxation because the shareholder receiving dividends in excess of Rs.10 lakh will have to pay a tax on such excess dividends at 10%, this has encouraged promoters of the companies going for buybacks in recent times rather than a dividend,” Rajesh Shanbhag, Advisory Head - Alternate Channels, Way2Wealth Brokers Pvt. Ltd told Moneycontrol.

Who doesn’t like regular payments and that to tax-free? But, at the same time, investors should also investigate why a company is paying a high amount of dividend from its income.

It could be a sign that company has limited growth opportunities or management is not confident to invest more in their business model.

Also, one should check the long-term history of dividend paid by a company while investing to get an idea about their capability to maintain this consistency going ahead, suggest experts.

“Companies which give special dividends create an illusion of extremely high yield, which will attract investors. Check out the stock's dividend payout ratio. However, you definitely need to evaluate the overall prospects for the stock,” Dyaneshwar Padwal, AVP – Technical Analysis, KIFS Trade Capital told Moneycontrol.

“Because only dividend amount may not bet the market expectation. Special dividends are one-time dividends and uninformed investors who jump in thinking the company can continue to pay such high dividends will be sorely disappointed,” he said.

The primary reason for an investor to bet on the stock market is either for capital appreciation or timely inflow through a dividend.

It certainly makes sense to invest in a stock with high dividend yield; however, it should have a board based analysis before taking the investment call.

Rohira of 5nance.com highlights two factor to consider while identifying a high dividend stock viz consistency in pay-out and stock price movement. “Any misreading in this two factors can lead to a wrong decision,” he said.

“Apart from the above 2 factors investor should study a level of consistency in its pay-out along with stock price movement which should be backed by stable growth along the timeline. Based on this holistic strategy, an investor should go ahead with its investment,” said Rohira.