Falling bond yields and marginal tax rate cut from 34.94% to 25.15% will improve the dividend payout profile of India Inc. immediately as capital allocation decisions on new investment may happen with a lag as demand environment remains weak.
Q) High dividend yield stocks have performed better in a falling real bond yield environment. What are your views?
A) High dividend yield stocks are ones which pay a high dividend as a percentage to the market price of its share. Although when it comes to stocks, investors prefer capital appreciation to dividend yield, but that doesn’t lessen the importance of dividends by the slightest. Under a falling bond yield environment, which makes it difficult to generate regular income by holding government debt, high dividend yielding stocks become more popular due to its stable income generation characteristic for investors looking to add income to their portfolios.
Q) If investors consistently reinvest dividend back into the markets. What are the kind of returns or alpha he could generate? A small example would be helpful.
A) When selecting high dividend paying stocks, investors must ensure they are paying attention to other fundamental factors as well such as the sales and profit growth of the company, EPS, debt vs. equity and so on. If selected carefully, one can generate high alpha by re-investing the dividends back into the markets. For example, if one had re-invested all dividends received from HUL in the last 10 years at the then prevailing prices, one would have had additional 25 shares of HUL today for every 100 shares held 10 years ago. This means an alpha of 25% over and above other returns such as capital gains. See below table for the calculation.
|Announcement Date||Effective Date||Dividend Type||Dividend %||Market Price of HUL||Dividend Amount||Number of shares if Dividend is re-invested|
Q) What are the other measures which one should use while picking dividend yield stocks?
A) Usually High Dividend Yielding stocks are on the list of those investors looking for stable and regular income flow without having to worry about the long term volatility in the stocks. They would like to remain invested in such stocks for longer period of time and hence it is important to look at other fundamental factors including long term growth and earnings growth, to ensure there is no capital erosion. One such example is Indiabulls Housing Finance, which although has a high dividend yield of 15%, however it has eroded over 70% of its shareholder value since the beginning of this financial year. If the objective is long term income stability, its best to avoid high volatility stocks such as these.
Q) What are your top dividend yield stocks which one should pick or are looking attractive?
- Vedanta : This company is in the business of commercial power and gas along with production and sale of iron and aluminum ore, and has seen a consistent performance for the past five years. Alongwith maintaining a high dividend yield, it is currently available below its book value and hence looking attractive.
- Indian Oil Corp: IOC is one of the Maharatna companies and has provided good financial growth and high dividend yields for over five years. However, its price has declined in recent years, but we can see a price uptrend recently.
- Procter & Gamble Health Ltd: Formerly known as Merck Limited, this company is a German multinational pharmaceutical, chemical and life sciences company. Besides maintaining high dividend yield ratio of over 9%, the net profit of this company has seen a huge growth in India over the years and can be considered at current prices for long term investing.