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Tuesday, March 24, 2009

Time To Invest For High Dividend Stocks

Even after a long year of turmoil, most investors are asking the question, "ye kitna upar jayega?" before buying stocks. Investors are still not prepared to accept the reality that the bull-run is long behind us and the market is staring at a drought of good news to take it forward. This new reality requires the investors to revisit their investments and buy stocks which are fundamentally sound.

The days of momentum buying (buy high and sell higher without looking at the company's finances) are over. Nor is it possible to double or triple your capital in ultra short time anymore. The froth is out and the investment world is back to its normal trajectory. Does this mean the end of the road for equities? Not really.

It just means that investors will now have to change their perception about equities. While equities were traditionally bought for capital returns, they could become excellent sources of steady income during bear phases. The lower stock price translates into higher dividend per share, thereby pushing up the dividend yield to attractive levels.

Right now, the market is full of low-hanging fruits where the post-tax yields are almost double those in fixed income instruments. ET Intelligence Group makes your task easier by doing the necessary legwork. We must add that this does not amount to 'buy' recommendation for any of the stocks listed in the table. The investors are advised to do their homework before taking the plunge.

Rationale behind dividend approach
The new financial year is just a week away. The beginning of the new fiscal will usher in the annual dividend season. Beginning from the middle of April, companies that follow the April-March financial year (and bulk of them do that) will start announcing the annual goodies to the shareholders. It makes sense to focus on dividends which are also incidentally tax-free in the hands of the investor. In fact, a dividend yield of 6.5% is equivalent to 10% interest earned over a period of one year, which is a taxable income.

Another important aspect of dividends is that they are more stable than corporate profitability. Most companies raise their dividend payout ratios during times of low profitability instead of cutting the dividends in tune with a decline in profitability.

In fact, in the Western countries, a large section of people invest solely for dividends. And a cut in dividends is considered as a fundamental degradation of a company's financials. For example, General Electric lost more than 30% of its value immediately after it announced a reduction in dividend and the shares of Citigroup dipped below $1 after it cancelled its annual dividends.

Will the dividends really come this year?
The number of dividend-paying companies in India and the total quantum of dividends would, no doubt, reduce this year compared to FY08. However, if we look back in history, a number of companies had a consistent dividend-paying record over the past 10-15 years regardless of the ups and downs in the business cycle. We also need to appreciate the fact that even the promoters of these companies depend on dividends as a source of their income.

We at ETIG sifted through heaps of data to identify companies that are most likely to maintain their dividend pay-outs. We only chose companies that never missed a dividend pay-out in the past 10 years, have healthy operating cash-flows, comfortable debt-to-equity ratio and haven't performed too badly in the first 9 months of the year. We excluded companies in the automobile, auto ancillary and real estate space. Our list also excludes newly listed companies.


Enjoying ample legroom: A case explained
Let's take the case of Tata Steel. Its profitability has been hit by the crash in steel prices. Being a commodity business, the steel industry is cyclical and has undergone several ups and downs in the past. However, if we look at the history of the past 15 years, the company has never missed a single dividend. Even when its PAT fell by more than 60% y-o-y in 2002, it cut its annual dividend by just 20% to Rs 4 per share.

CHECKOUT: High Stock Dividend Yield Companies

The worst of estimates predict a mere 25% decline in Tata Steel's profits in FY09. Even if the company just maintains last year's payout ratio, it would still pay Rs 12.5 per share as dividend. This is a 7.1% yield on the scrip's prevailing market price.

Companies such as MM Forgings, Deepak Fertilisers, Graphite India, Tamilnadu Newsprint and Balmer Lawrie have actually seen a rise in profits in the first 9 months of FY09 over the past year. So they just need to maintain their dividend at the past year's levels to make the cut. Most of the companies in our list paid out a very small portion of their last year's profits as dividends. This provides them ample leg room to fiddle with pay-out ratio and thereby maintain dividend stability.

If we broaden our search to companies paying dividends since FY 2000 - to include companies listed in 1999 or 2000 - more interesting names would crop up. The readers can log on to www.etintelligence.com website for the detailed list.

At the end, we must mention that the payment of dividend is at discretion of the company management and shareholders should not treat it as their right. Nevertheless, in the current market scenario, dividend payout could and should be a compelling reason for buying shares, rather than being disappointed at the stagnant stock prices.
Source: EconomicTimes

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