In a strong equity market, where stocks are generating fabulous capital appreciation, the often-overlooked aspect is ‘dividend’. Investing in stocks with healthy dividend yields and high dividend payouts is quite a stable format of investing. As markets are somewhat under the weather, dividend yielding stocks tend to come into focus. Generally, fourth quarter of the financial year is good time to look for healthy ‘dividend’ yielding stocks.
Fixed Deposit Yield vs Dividend Yield
In the current economy, where bank FDs offer interest rates to the tune of 6-7 per cent, there are stocks which are giving dividend yields similar to that. Further, the interest on bank fixed deposits is taxable whereas the dividend from equity is completely exempt from tax (except when the dividend income in a financial year exceeds Rs 1 Million). In that context, post-tax dividend yields of some of the stocks is way higher than the post-tax interest yield on bank fixed deposits. So, investors can consider some of the high dividend yield stocks to bring in regular inflows.
PSUs: Highest Dividend Payers
Based on the historic evidence, profit making Public Sector Undertakings (PSUs) have been high dividend payers to address the fiscal deficit of the government to balance the tax collection shortfalls. Generally, by fourth quarter of the financial year, government gets clear picture in terms of direct tax and GST collections for the financial year. Hence, they will get an assessment of possible fiscal deficit quantum. In that context, profit making PSUs play a crucial role by announcing dividends / special dividends. Some of the stocks such as Coal India have seen huge dividend pay-outs over the years. Fourth quarter
of the financial year traditionally provides maximum activity in terms of PSU dividends.
Further, in the ongoing financial year FY17-18, there was a huge drop in dividend payment by RBI to government for its financial year ending June 30, 2017 owing to demonetisation at Rs 30,659 Crore as against Rs 65,876 Crore in the previous year.
Further, this being the first year, the GST collections were also relatively lower than anticipated. So, keeping demonetisation and GST impacts into account, dividend catch-up from other profit making PSUs becomes all the more important. With the ongoing market correction post Union budget, the stock prices of some of these PSUs have seen rough treatment, resulting in possibility of healthy dividend yields.
Explaining the Concept
Investors should always keep in mind that simply because a company pays high dividend doesn’t necessarily mean it is a strong company. There is no guarantee that these companies will become multi-baggers. Investors shall approach each stock on its individual merit, while some stocks become multi-baggers and some are good dividend payers.
Similarly, simply because a company never pays dividend won’t make the company bad. For instance, Warren Buffett run Berkshire Hathaway almost never paid dividend in its entire history as he believes that retaining money with him can lead to more quality investments; and hence higher returns for the shareholders of the company in the form of higher share price. That’s the reason each company’s dividend strategy should be understood on its individual merit.
Dividend theme based stocks are also an interesting concept that investors can keep in mind in their overall investment approach. Out of the profits that the company earns in a year, how much to be retained and distributed as dividend is purely the company’s decision taking into account their expansion plans and the capital required to fund such expansion plans.
From investors perspective, dividend can offer that regular income especially for those investors who look for stable forms of inflows. For such section of investors, select profit making PSUs can be good space as they have been giving healthy dividend yields.