Why it is important to buy best dividend paying stocks in India? Value investor loves dividend paying stocks. Going by historical data, dividend stocks cannot give returns like growth stocks. But what dividend paying stocks provided is unparalleled price stability and regular income. Even in worst of times (like 2008) dividend paying stocks showed great resilience compared to tumbling SENSEX and NIFTY. It means, companies that can afford to pay consistently reasonable dividends are stable stocks. But what makes dividend paying stocks so stable? Personally, I am a big fan of dividend paying stocks. The possibility to own equity and also generate fixed income makes them my favourite investment option. I invest my money with a objective of building a solid investment portfolio. Dividend paying stocks are one of the most important constituent that makes my investment portfolio very solid. For value investors high dividend yield also means stocks being undervalued. A combination of high dividend yield and low dividend payout ratio is very good for investors. Here I will give you a list of best Indian dividend paying stocks with low payout ratios.
Majority of investors would like to invest in growth stocks. Investors focusing on dividend paying stocks as less compared to growth stocks. The reason being, dividend paying stocks cannot give as good long term capital appreciation as growth stocks. But what dividend paying stocks can give is higher income-predictability. Investors cash-in as dividend income is very fast and predictable. You can never be as sure about capital appreciation as you can be about dividends. Dividend income gets automatically credited to ones account quarterly/annually. By investing in dividend paying stocks we can earn short term income in addition to long term capital appreciation. Suppose we have a stock portfolio worth Rs 1,000,000 which yields dividend of 5% per annum. It means each year we will earn Rs 50,000 as dividend income. This dividend income (Rs 50,000) is an assured income that gets credited to our account without hassel. Capital appreciation is only a virtual gain that only gets realized when you sell your holdings. But dividend income is like streams of assured income in our pocket.
When we are investing in dividend paying stocks we are minimizing our exposure to market volatility. How? Dividend paying stocks allows us to earn short term income. Due to this predictable cash-ins, investors get less tempted to sell their holdings. This attitude of investors towards dividend paying stocks gives it its stability. When investors like to hold on to a stock this gives the stocks its stability.
The purpose of writing this article is to publicize the concept of dividend focused investing. Not many people are motivated to buy stocks for earning dividends. Dripping-dividends are less exciting for them compared to more visual capital appreciation yields. Capital appreciation can never be as certain as dividend income. People favour capital appreciation because it gives probability of higher earnings. Lets see some some advantages of buying dividend paying stocks. I am sure it will motivate some to buy dividend stocks over growth stocks.
Dividend Income are more assured than capital appreciation
As we have seen before, dividend income is more predictable than capital appreciation. Dividend earning is very closely related to fundamentals of company. If fundamentals remain strong, investors will continue to earn decent dividends like before. Capital appreciation is also linked with fundamentals of business, but they are more influenced by speculative factors. Moreover, long term capital appreciation asks investors to wait for long term to see benefits. But dividend income can start dripping in your pocket within one year of stock purchase. So, even though the companies fundamentals are good, but capital appreciation can be poor as the stock remains out of favor. But this situation will never come for dividend paying stocks. Dividends will continue to drip-in if fundamentals of company is strong.
Dividend investors look at intrinsic value of stocks instead of market price of stocks. A dividend investor will not buy stocks even if the market price has fallen by say 50%. They will first compare the intrinsic value with market price, and if market price is lower only then they will buy this stock. Dividend yield and certainty of dividends are two important parameters for intrinsic value calculation. Even though the market price of stock has tumbled down but it still does not yield high dividends then it is of no use.
How we can identify a good dividend paying stock?
A good dividend paying stock can be identified in three ways, first by checking how frequently the company has paid dividends in the past. Secondly by checking the valuation of company and thirdly by checking the growth possibility of dividends.
How frequently the company has paid dividends in the past
The frequency of dividends paid by company can be checked by looking at companies profit and loss accounts. In profit and loss accounts, equity dividends paid to shareholders each year is mentioned. Regular entry of equity dividends in profit and loss account tells us whether the company has been paying consistent dividends or not. Top 5 market capitalization companies and dividends paid by them in last five years is provided here just for example:
|Mar ’12||Mar ’11||Mar ’10||Mar ’09||Mar ’08|
|Reported Net Profit||12,786.34||10,975.98||7,569.99||5,618.51||4,696.21|
|Reported Net Profit||25,122.92||18,924.00||16,767.56||16,126.32||16,701.65|
|Reported Net Profit||6,162.37||4,987.61||4,061.00||3,263.59||3,120.10|
|Reported Net Profit||21,003.00||20,040.00||20,286.30||16,235.67||15,309.32|
|Reported Net Profit||8,065.10||4,723.56||3,779.92||3,295.38||2,453.80|
But it not sufficient to check only the dividend payment consistency. It is equally important to check if the dividend paid will sustained in future or not. This checking can be done by looking at the dividend payout ratio. If dividend payout ratio is too high (above 50%), it is a hint that it cannot be sustained in future.
|Mar ’12||Mar ’11||Mar ’10||Mar ’09||Mar ’08|
|Dividend Payout Ratio||34%||45%||36%||70%||29%|
|Dividend Payout Ratio||33%||40%||42%||42%||41%|
|Dividend Payout Ratio||57%||69%||94%||43%||42%|
|Dividend Payout Ratio||13%||13%||12%||13%||12%|
|Dividend Payout Ratio||78%||52%||58%||52%||70%|
How to check present valuation of company?
Company valuation can be identified by looking at companies earning yield and PEG ratio. Earning yield is inverse of P/E ratio. Higher is the P/E ratio the lower will be the earning yield. Higher earning yield hints at stock being undervalued price levels. PEG ratio is also a great valuation tool for investors. PEG ratio can be calculated by dividing PE Ratio by earning growth. A PEG ratio of less than one hints at market price trading at undervalued price levels.
How to check growth possibility of dividends?
Check EPS growth rate appearing in Income statement
Companies share their profits with shareholders as dividends. If the philosophy of the company is to share profits then growing EPS will mean higher dividend payout. So for all dividend focused investors it is advisable to check the EPS growth rate and then forecast future dividend income.
Dividend income is like an interest income for investors
If there is a recession prevailing in the world still investors can be sure that companies will share a part of their profits as dividends. When the market is booming and GDP of the economy is booming you will be sure to get even higher dividends. These dividends are like short term earnings (quarterly/annually) for investors and this is the reason why investors who are holding these stocks do not sell them easily.
When market is performing badly, dividend paying stocks provides incentive to buy more stocks
If you bought say 10 Nos dividend stocks at $20. Suppose these stocks pays $1 as dividend income. It means the dividend yield is 5%. Suppose due to Eurozone crisis the price of this share falls to $15, you will be prompted to buy more stocks. Why? Because this price dip has increased dividend yield to $1/$15=6.67%.
The companies which pays dividends are mostly stable, blue chip companies. These dividend paying stocks are always in demand and it does not take lot of time for these stocks to regain back its lost glory. So both from point of view of ‘high demand’ and ‘low selling probability’ the market price of these stocks are very stable as compared to other stocks.
Top Dividend Paying Stocks in India
(As on December’2013)
|SL||Company||Sector||Market Price (Rs.)||Market cap (Rs.in Cr.)||Dividend Yield (Avg.3 year)|
|1||J B Chem & Pharm||Pharmaceuticals||111.25||942.42||13.78|
|4||G S F C||Fertilizers||57.30||2,283.28||9.60|
|6||B H E L||Capital Goods – Electrical Equipment||162.05||39,663.36||8.84|
|10||Oil India||Crude Oil & Natural Gas||463.35||27,853.64||7.73|
|11||I O B||Banks||50.75||4,689.78||7.55|
|12||V I P Inds.||Plastic products||57.00||805.51||7.37|
|16||C P C L||Refineries||64.55||961.22||7.23|
|18||United Bank (I)||Banks||33.10||1,240.28||6.75|
|21||O N G C||Crude Oil & Natural Gas||291.75||249,606.42||6.51|
|22||BGR Energy Sys.||Infrastructure Developers & Operators||123.00||887.59||6.50|
|23||Union Bank (I)||Banks||125.20||7,471.86||6.39|
|24||Guj Gas Company||Gas Distribution||263.85||3,383.88||6.32|
|28||Tata Power Co.||Power Generation & Distribution||85.90||20,384.69||5.78|
|29||Timken India||Auto Ancillaries||164.40||1,117.92||5.78|
|30||Bank of Maha||Banks||37.75||2,497.07||5.74|
|31||Monsanto India||Agro Chemicals||691.30||1,193.39||5.50|
|35||Jaypee Infratec.||Infrastructure Developers & Operators||21.00||2,916.76||5.16|
|38||Bombay Burmah||Plantation & Plantation Products||112.05||781.80||5.06|
|39||G N F C||Fertilizers||68.45||1,063.84||4.99|
|40||Pun. & Sind Bank||Banks||44.65||1,134.20||4.99|
|41||Rolta India||IT – Software||65.75||1,060.74||4.82|
|45||H P C L||Refineries||226.75||7,678.37||4.56|
|46||Graphite India||Capital Goods-Non Electrical Equipment||78.05||1,524.91||4.48|
|47||Multi Comm. Exc.||Miscellaneous||413.95||2,111.06||4.43|
|48||SJVN||Power Generation & Distribution||20.40||8,438.72||4.41|
|51||Neyveli Lignite||Power Generation & Distribution||60.50||10,150.15||4.35|
|52||S C I||Shipping||42.95||2,000.61||4.27|
|54||NMDC||Mining & Mineral products||139.95||55,486.20||4.24|
|55||Natl. Aluminium||Non Ferrous Metals||38.00||9,793.51||4.17|
|56||St Bk of Bikaner||Banks||319.40||2,235.80||4.15|
|59||India Infoline||Stock/ Commodity Brokers||61.90||1,828.91||4.04|
|60||Hexaware Tech.||IT – Software||119.05||3,566.77||4.03|
|61||Jagran Prakashan||Media – Print/Television/Radio||82.85||2,749.89||4.02|