Buying stocks involves a lot of risk taking, but investors who pick companies with strong fundamentals and have a long horizon, invariably succeed. Investing in high dividend yielding stocks is considered a safe bet by many analysts. That’s because only those companies that are confident about future earnings and have strong cash flow tend to distribute dividends.
The capital appreciation in high dividend yielding stocks might be less, but investors are assured of a steady flow of income. Such stocks are an asset in one’s portfolio when marketplaces turn bearish. What’s even more, dividends aren’t taxed in the tactile hands of shareholders, making them appealing for investors.
Historically, mature businesses with strong cashflow and limited growth opportunities have a tendency to give away dividends. That’s because dividends are given out of companies and profits in high-growth companies require more capital for further expansion.
Bluechip companies pay great dividends to traders generally. ONGC, Tata Metal, Punjab National Bank, BHEL, Coal India, Gail (India), NTPC, Hero MotoCorp, Bajaj Auto and Bank of Baroda are the top 10 10 dividend yielding stocks on the Nifty-50 currently, with an yield of 3.9 per cent to 2.3 per cent.
There are several midcap and smallcap stocks which have excellent dividend yield. JB Chemical substances and Pharma includes a dividend yield of 51 % but that is since the company paid out an interim dividend of Rs. 40 in August. So, investors need to look at consistency of dividends before purchasing an ongoing company.
In an interesting research, domestic brokerage Motilal Oswal said dividends certainly are a key criterion in identifying the “blue chip-ness” of a stock.
Regarding to Motilal Oswal, dividend yields are more homogenous in comparison with popular valuation metrics like price/earnings and price/book value, both across companies and meant for the same company as time passes. Dividend yield may be the dividend divided by the share cost expressed as a share. The cash is measured by it flow investors are getting for every rupee invested.
High payout supports valuations and stock price levels across earnings cycles. The higher the dividend payout, the higher the P/E (the price to earnings ratio) should be, the brokerage concludes.
Some Sensex companies like Infosys, Wipro, Reliance Sterlite and Industries have got positive net money or suprisingly low net debt on the balance sheets, the brokerage states. However they are payouts aren’t as high because they could potentially be. Therefore, their P/Es are less than high-payout peers and the high money is deflating the come back on equities, just one more dampener on valuation multiples.
Most of these stocks have lagged their peers over the last year – a strong indication that companies should start getting more generous when it comes to rewarding shareholders.