CPSE ETF: An attractive way to bet on blue-chip high-dividend yield PSU stocks

The CPSE ETF, which is a basket of blue-chip PSU stocks, has emerged as an attractive investment opportunity for investors according to an article in the ET.

ET points out that the CPSE ETF is drawing investors owing to several factors such as the attractive valuations, dividend yields that exceed bank deposit rates, tax arbitrage over direct equity and negligible expense ratio.

The ETF has 12 well-known stocks in its holdings.

These are the following:

Power Grid Corp Of India Ltd
NTPC Ltd
Oil & Natural Gas Corp Ltd
Coal India Ltd
Bharat Electronics Ltd
NMDC Ltd
NHPC Ltd
Oil India Ltd
NBCC India Ltd
Cochin Shipyard Ltd
SJVN Ltd
NLC India Ltd

Of the 12 stocks in the portfolio, four companies, namely, Power Grid, NTPC, Coal India and ONGC, constitute 77% of the portfolio


(Image Credit: ET)

According to the ET, the CPSE ETF has a dividend yield of 5.55%, PE of 10.68 and a PB of 1.09. By contrast, the Nifty 50 has a PE of 36.46, dividend yield of 1.2 and PB of 3.75.

An expert was quoted as saying that the undervaluation of stocks in the CPSE basket and high dividend yield make it an attractive bet.

“Most stocks are trading at a steep discount to historic valuations as investors are not sure about the government’s direction. In the recent past, representatives from the government have been engaging with fund managers on ways to improve valuations,” another expert stated.

Lower tax on ETF if the 'growth' option is exercised.

Experts also pointed out that dividends earned by a shareholder in a company will be taxed as per his tax bracket.

So, a taxpayer in the highest tax bracket will pay 42% tax on dividends earned from equity.

However, if the same is earned through the 'growth option' in a mutual fund, it will be added to the NAV and will reflect there.

An investor holding such a mutual fund pays only long term tax of 10% if units are sold after a year, and 15% if within, thereby giving a tax arbitrage of up to 32%.