It’s the era of low interest rates, which means investors are receiving lower yields on their deposits. It’s also a time when companies start paying annual dividends to shareholders and investors. Hence, to generate an income strategy, investors could now look at companies that pay top bucks to investors through dividends.
Dividend yields are returns investors make on their investments solely through dividends distributed by companies annually. By dividing the per share dividends received by the purchase price, investors can easily calculate a company’s dividend yield.
For instance, recently Mahanagar Gas declared a dividend of Rs 17.50 per share. On its current share price of around Rs 591, the dividend yield works out to 2.97 per cent per share.
In this market, a dividend yield of 3 per cent or more is considered a relatively good yield. The S&P CNX Nifty’s dividend yield works out to 1.25 per cent at current levels of 8600. By comparison, almost all banks offer an interest of around 3.5 per cent per annum.
The basic criteria investors should look for in dividend yields are consistency of profits and dividends paid. A company that maintains a steady dividend payout policy even increasing it yearly is relatively a better off investment as this shows that sufficient cash flows are being generated from the business.
Investors should also keep an eye out on taxes. The recent budget introduced a tax of 10 percent on dividends received of over Rs 10 lakh. This is in addition to the dividend distribution tax paid by the company. Prior to this, dividends were completely tax free in the hands of investors.
However, even with the dividend tax, net yields are still comparable to other fixed income instruments that are taxable. For investors whose dividends are less than Rs 10 lakh, the deal is even sweeter. For example, on a 4.5 per cent return that is taxed for an investor in the 30 per cent bracket, the net yield works out to about 3.15 per cent.
Besides, some dividend yield stocks also offer the possibility of an appreciation in invested principal. Companies that grow their profits at a decent pace also increase the dividends in the coming years. Long-term investors, thus, can get better yields and potential profit on capital gains. Hence, investors should also look at a steady increase in dividends over the years.
Currently, many companies are providing a decent dividend yield. A recent HDFC Securities report places Rural Electrification Corporation as having a dividend yield of 7.2 per cent. Among other companies Sonata Software, Power Finance Corporation, Indiabulls Housing are providing yields of 6 per cent, 5.9 per cent and 4.5 per cent respectively.
In addition, stocks like Coal India pay out interim dividends that cumulative result in a yield of 6.18 percent. Some of public sector companies are also offering good dividend yields.
Companies that increase dividends over the years provide a better yield on one’s investment as the years go by. Besides, dividend yield stocks generally are less volatile than the average market, and so offer a dash of stability to the overall portfolio. And they go some way in raising the overall yields of an investors’ stock portfolio.
BW Reporters
Having addressed business, stock markets and personal finance for the last 18 years, Clifford Alvares has ridden the roller-coaster markets - up close and personal -successfully, traversing the downs and relishing the rises. The greater part of his journalistic ventures has gone into shaping articles about how to shape portfolios
