By: Tavaga Research
Investors generally associate money making with stocks. They buy a stock at a specified price and later, if the price of the stock appreciates, investors make a lot of money by selling those shares. There are, however, other ways of making money including dividends.
When a company declares profitability, it can share a proportion of the earnings with its shareholders, based on the number of shares held by them. This pay-out is referred to as dividends and is generally paid on a per stock basis.
For instance, a company, for a specified period, may declare a dividend of Rs 10 per share. If an individual holds 100 shares during the declaration period, then that individual is entitled to receive Rs 1000 as a dividend.
Companies that pay out dividends on a regular basis are referred to as dividend-paying stock. The best dividend stocks to buy are usually those with a well-established track record of earning distributions.
A dividend can be described as a reward extended by publicly-listed companies to their shareholders, paid out of the net profits of the company.
The pay-out is in the form of cash and paid predominantly from the leftover profit share having met all the expenses. However, companies may also decide to retain the profits to reinvest in the business or reserve it for future use.
Dividend investing is a strategy that provides investors with two potential sources of profits; the predictable income from the payments of dividends and the other from the capital appreciation over time.
This strategy can also be appealing to those investors looking for lower risk. Some of the best dividend stocks can be very safe at the same time.
However, there are pitfalls, that investors should be aware of. Not every dividend-paying stock can maintain a pay-out in economic downturns as the pandemic has demonstrated, but a diversified portfolio of these stocks can steady this source of income.
The dividend yield is a financial ratio that indicates the cash flow investors are getting back relative to the market price of a stock. In other words, the dividend yield calculates the proportion of a company’s market price that the shareholders receive in dividend form.
Companies that consistently pay a higher dividend relative to the market price are referred to as high dividend yield stocks.
Dividend Yield = (Annual Dividend/ Stock Price) * 100
For instance, if a listed company with a share price of Rs 100 pays a dividend of Rs 5 per share, then the dividend yield of the stock is 5 percent.
The pay-out ratio measures the proportion of the net income that the company has paid out as a dividend. It is measured as:
Pay-out Ratio = Annual Dividend Per Share/ Net Income
Bajaj Auto is a leading manufacturer of two-wheelers that has proven itself over the years. The differentiating factor for Bajaj Auto is its relentless focus on markets outside India. It has managed to de-risk its business by not being overly reliant on any one geography.
The company is by far the largest Indian exporter of motorcycles and three-wheelers. Its revenue from exports increased from 28.2 percent in FY10 to 42 percent in FY20.
Bajaj Auto, being the market leader in the three-wheeler market, continues to dominate that segment. However, the company lags behind its competitors in the scooter market, after the motorcycle momentum picked up in the 90s.
Bajaj Auto’s growth has been driven by its towering brand value and in recent times its alliance with KTM.
The company recently entered the two-wheeler electric space with the launch of the iconic Chetak. The company has seen its revenue grow at a compounded annual growth rate (CAGR) of 10 percent over FY10-FY20, while PAT grew at a CAGR of 12 percent over the same period.
The company enjoys a dominant position in the natural gas transmission business cornering a market share of around 70 percent, utilizing its large pipeline network of around 12,200 km. Laying these pipelines entails large capital investments and navigating the complex regulatory requirements.
The focus of the central government to increase the share of natural gas from 6.5 percent to 15 percent of the overall energy mix bodes well for the company.
The demand for natural gas is expected to remain healthy particularly from city gas distribution (CGS) and the fertilizer sector. GAIL has also diversified its business model by investing in the downstream sectors including the manufacturing of petrochemicals and LPG.
The company’s financial profile is characterized by strong cash accruals and healthy profitability with comfortable debt metrics and capital structure.
PFC was incorporated in 1986 by the Indian Government as a financial institution to finance, facilitate, and promote the development of the power sector. It is a leading power sector public financial institution and a non-banking financial company (NBFC) providing funds as well as non-fund support for the development and growth of the power sector in India.
The company plays a major role in channelizing investments within the power sector and functions as a vehicle to develop the power sector. The clients of the company include state power utilities, power departments, private power sector utilities, central power sector utilities, power equipment manufacturers, etc.
All these clients are involved in several aspects of the generation, transmission, distribution, and related activities within the power sector.
The company started as a cigarette manufacturing company with brands such as Flake, Gold-flake, Classic under its banner. It further expanded into education and stationery products, paperboards and packaging, hospitality, among others.
ITC is expected to strengthen its market position in the spice segment as well, post the acquisition of Sunrise Food Private Limited.
A wide range of products, a valuable brand, robust research and development capacity and an established distribution network have enabled ITC to consolidate its position as the leader in the Indian market.
Sustained market share and consistent profitability over the years, notwithstanding the increase in duties, reflect the strong brand loyalty of cigarette smokers.
Healthy internal cash accruals, low debt, and robust liquidity provide strength to the financials of the company.
Hindustan Zinc has a metal mining capacity of approximately 1.2 MTPA, a smelter capacity of around 0.89 MTPA for zinc, 0.205 MTPA for lead, and 800 TPA for silver. The company is the second-largest miner of zinc-lead and the fourth-largest smelter of zinc-lead globally.
Cornering a market share in excess of 75 percent in volume terms, Hindustan Zinc enjoys a dominant position in the domestic Zinc Market.
More importantly, the company enjoys a significant edge over its competitors, given that the business operation of the company demands massive capital requirements and limited zinc ore mines.
Its presence in the global markets enhances the diversification of the revenue, accounting for around 20 percent of revenue from exports in FY20.
As of the end of FY20, Hindustan Zinc had net reserve and resources totaling 403 MT, ensuring a long mine life of over 25 years.
Pfizer Limited is a subsidiary of the world’s premier pharmaceutical corporation, Pfizer Inc. The company is engaged in the manufacturing, marketing, trading, and export of pharma products.
It has three divisions in India- animal healthcare, research & development, and pharmaceuticals. Pfizer Limited has a portfolio of products in excess of 150 products across 15 therapeutic areas.
It enjoys a unique advantage of access to Pfizer Inc’s global portfolio. The company was a pioneer in introducing clinical research in India. Pfizer Limited has state-of-the-art manufacturing facilities in Goa, producing over a billion tablets annually.
Two of Pfizer India’s well-known brands include Becosules- a multivitamin and Corex- a cough formulation.
The company was incorporated in 1999 as Power Trading Corporation of India, with the objective of providing a risk-mitigation opportunity to private sector power project developers. It is engaged in the business of trading activities including long term trading of power generated from large power projects as well as short term trading.
It acts as an intermediary between the buyer and the sellers of power. PTC acts as a nodal agency for cross-border trading. For setting up independent power production plants, PTC also offers advisory services.
It has signed MoU’s with various power plants to purchase and sell the excess power generated. These MoU’s are for capacity in excess of 28,000 MW for projects based on coal (both domestic and imported).
Although these companies are amongst the top dividend-paying stocks in the country, this should not be the only reason for investors to include these in their portfolios. Several companies continue to pay dividends even while churning losses. There is a gamut of other factors that go into selecting stock for a portfolio including corporate earnings, corporate governance, etc.
In addition, it is important to mention here that the dividends are paid at the discretion of the company. If a company has paid out dividends in the past that doesn’t imply the company will continue to do so in the future.
Also, post the budget last year, the dividends are now taxed in the hands of the investors. For individuals, dividends will be taxed as per the applicable slab rate. For corporate shareholders, dividends will be taxed based on their effective tax rates.
Investors looking to develop an alternative income source can consider dividend-paying stocks after doing thorough research or taking advice from a SEBI Registered Investment Adviser (RIA) like Tavaga Advisory.
Proctor & Gamble Health Ltd., Sanofi India Ltd., and BPCL Ltd. (Bharat Petroleum) are some more high dividend yield stocks that could be considered blue-chip in nature.
Cox & Kings India, a company best-known for the alleged fraudulent activities in India has surprisingly one of the highest dividend yields. The Enforcement Directorate (ED) arrested the CFO of Cox & Kings, a month ago. The company has a dividend yield of 60%.
| Company Name | Dividend Yield (in%) |
| PTC India | 9.27 |
| Oil India | 9.01 |
| SJVN | 8.48 |
| Coal India | 8.38 |
| PFC | 7.83 |
| REC | 7.56 |
| HUDCO | 6.94 |
| RITES | 6.08 |
High dividend yield stocks listed on the Nasdaq index include – Altria Group, AT&T, ONEOK Inc, Kraft Heinz, Gilead Sciences, PepsiCo, Intel, Mondelez International, etc (Source: Nasdaq.com);
Disclaimer: The above write-up is only for educational and informational purposes. Kindly do not consider this as a recommendation to buy or sell the stock.
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