What Is Dividend?
A company raises funds by way of equity share capital from its shareholders. A dividend is a payment made by the company to its shareholder as a share of the profit earned during the financial year. Usually, some part of the profits earned by a company is retained for business purposes while a part is distributed to the shareholders.
What Are “Dividend Stocks”:
Stocks in companies that have an uninterrupted track record of distributing a large share of their profits are known as “dividend stocks”. Such stocks are in companies that have reached a certain maturity in their growth profile and do not have requirement for large capital. Because such companies do not expect dramatic increase in sales or profits, they are contrasted with “growth stocks” that need to conserve capital for ploughing back into their operations.
What Is “Dividend Yield”?
‘Dividend Yield’ is a financial ratio that shows how much the company pays out in dividends each year relative to its share price. It is calculated by the following simple formula:
Interim + Annual Dividends in the year/Price per share x 100
GIC Housing Finance declared a dividend of 45% (Rs. 4.50 per share). Because its market price is Rs. 84, the dividend yield is 4.50/84×100 = 5.36%.
The dividend yield for VST Industries is the following:
650% dividend = Rs. 65 per share / market price of Rs. 1730 x 100 = 3.76%
What Is “Dividend Record Date”?
The “record date” is the date when the company closes its register of members to determine the shareholders who are entitled to the dividend.
The date is announced sufficiently in advance to the stock exchanges.
Prior to the record date, the shares are quoted on a “Cum Dividend” basis. On the “record date”, the share becomes “Ex Dividend” meaning that purchases of the stock after that date will not be eligible for dividend.
What Is “Dividend Payout Ratio”?
The “dividend payout ratio” helps to determine how generous the company is when distributing its dividends i.e. what proportion of the profits are being distributed.
The formula is very simple:
Total Interim & Final Dividends in the year/ Total Profits for the year
Example 1: GIC Housing’s net profit for the year ended 31st March 2012 was Rs. 59.04 crores. It distributed Rs. 24.23 crores as dividend. So, the dividend payout ratio is 24.23/59.04 x 100 = 41.04%.
Example 2: VST Industries’ net profits for the year ended 31st March 2012 was Rs. 142.51 crores. It distributed Rs. 100.37 crores as dividend. So, the dividend payout ratio is 100.37/142.51 x 100 = 70.43%.
Advantages of High Dividend Yield Stocks:
The biggest advantage is that the high dividend yield provides a floor to the stock price. For example, GIC Housing Finance already has a high dividend yield of 5.36%. Even if the entire stock market goes down, there will always be investors willing to buy GIC Housing Finance because of the attractive yield. If the stock price slumps lower, the dividend yield will increase, attracting more investors, and thereby preventing the slump in the stock price.
Disadvantages of High Dividend Yield Stocks:
The biggest disadvantage is that these stocks are in companies that do not have ambitious growth plans and so they do not need to conserve capital. VST Industries is a good example of this. It is in a sunset industry (tobacco) where there is no scope for expansion and the existing customers are also dwindling thanks to health concerns and high taxes. That is why the dividend payout ratio is high at 70%.
These are not “growth stocks” and so, generally speaking, the chances of getting a multibagger is rare. VST Industries is an exception to this rule, having given a fabulous return of 2,528% since 1.1.2000 (market price than was Rs. 65 and today it is Rs. 1,730).
Which are the High Dividend Yield Stocks In India:
The latest list of high dividend yield stocks is provided by Jainam Share Consultants.
|High Dividend Yield Stocks|
|Company Name||Sector||Latest Price (Rs)||Face Value (Rs)||Dividend Per Share (Rs)||Dividend (%)||Dividend Yield (%)|
|HCL Infosystems Ltd.||IT – Hardware||39.20||2.00||8.00||400.00||20.41|
|PSL Ltd.||Steel & Iron Products||58.45||10.00||4.00||40.00||6.84|
|SRF Ltd.||Textile – Manmade Fibres||207.75||10.00||14.00||140.00||6.74|
|Andhra Bank||Bank – Public||99.55||10.00||5.50||55.00||5.52|
|Corporation Bank||Bank- Public||402.70||10.00||20.50||205.00||5.09|
|Aarti Industries Ltd.||Chemicals||72.70||5.00||3.50||70.00||4.81|
|Allahabad Bank||Bank – Public||133.15||10.00||6.00||60.00||4.51|
|Balmer Lawrie & Company Ltd.||Diversified||588.25||10.00||26.00||260.00||4.42|
|Graphite India Ltd.||Electrodes & Welding Equipment||82.05||2.00||3.50||175.00||4.27|
|Indian Bank||Bank – Public||176.00||10.00||7.50||75.00||4.26|
|Deepak Fertilisers & Petrochemicals Corpn. Ltd.||Fertilizers||131.45||10.00||5.50||55.00||4.18|
|Syndicate Bank||Bank – Public||96.75||10.00||3.80||38.00||3.93|
|Jammu & Kashmir Bank Ltd.||Bank- Private||935.70||10.00||33.50||335.00||3.58|
|Bajaj Holdings & Investment Ltd||Finance – Investment||751.40||10.00||25.00||250.00||3.33|
Are there Mutual Funds that invest only in dividend stocks?
Several Mutual Funds have schemes dedicated to dividend stocks. Among the popular ones are:
BNP Paribas Dividend Yield Fund
Birla Sun Life Dividend Yield Plus
Principal Dividend Yield Fund
ING Dividend Yield Fund
Tata Dividend Yield Fund
IIFL Dividend Opportunities Index Fund
UTI Dividend Yield Fund
Tata Liquid Fund (Daily Dividend)
UTI MIS – Advantage Plan – Flexi Dividend Plan
ICICI Prudential Liquid Plan (Monthly Dividend)
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