High Dividend Yield Stocks
With inflation at 12%, investments in debt instrument (bank deposits) which offer yield of around 10% no longer seem attractive. High dividend yield stocks provide both consistent cash flows as well as a potential for capital appreciation.
What is dividend yield?
Dividend Yield = annual dividend per share / stock’s price per share
This measurement gives the percentage of return paid out to the share-holders in the form of dividend. Older companies tend to have a much more higher and consistent dividend yield than smaller companies.
Dividend Yield Trap
Companies which pay high dividends are typically good long term investments. However, the investor must be display some caution and look at the company’s fundamentals before investing in the stock. Buying a company which is on a decline may not help, as it may not be able to payout the dividends in the future. Dividends are paid out of cash flows, so check if the company the company has healthy cash flows and consistent earnings and growth.
Other Factors
Removal of dividend tax also makes some of these stocks very attractive. So watch out for companies which have a high dividend yield and a low payout ratio, as this means that these companies have enough money to pay the investors as well as enough to plough-back into the business. Investment in high-dividend yield stocks is considered to be a defensive strategy as historically, these stocks have done well during market downturns. They also provide possibilities of capital appreciation during reviving markets.
Simply put, these stocks give the triple benefits of dividend income, downside risk management and scope for capital appreciation.
Electrosteel Castings, Honda Siel Power, EID Parry and Tata Investment Corporation are few stocks with a high dividend yield and low payout. Coromandel Fertilisers is another bright stock with a dividend yield as high as 8.5 per cent and a payout of 30 per cent in the past.
Others would include companies such as Castrol and Ashok Leyland.
August 20th, 2008 at 5:18 pm
Coromandal fertilizers have recommended dividend of 175%. Face value is Rs. 2 . So dividend works out to Rs. 3.5. Market price is 170. So yield works out to 1.6%. Kindly Clarify.
August 21st, 2008 at 2:34 pm
The 8.5% and 30% yields were in the past, now it could be lower. There could be two reasons why the company is recommending lower dividends this time, one is if the company is in expansion mode, and the second is if the company actually does not have enough profits.
Fertiliser companies have always enjoyed massive subsidies, so in this case it looks like the company wants to plough back profits for expansion.
August 21st, 2008 at 2:45 pm
dividends need to be assesed over long time periods, since they are somewhat refelctive of a company’s character in terms of investor relations, the data mentioned talks in terms of the last 5 years, you are very right about pointing out the change in trend (1.6%) - my take is the same as Kaustabh’s on this issue, especially with the recent subsidy announcement and given that overall production capacity needs to be ramped up since there is an acute shortage of fertilisers in the country.
October 4th, 2008 at 4:10 am
foreign currency trading…
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October 13th, 2008 at 10:37 am
great post hope to see some additional comments next Sunday…adios
November 1st, 2008 at 12:03 am
Great post. As mentioned, payout ratio is equally important. High payout ratio implies that the company does not have any plans for expansion and the chance of increase in stock price will be less. A high dividend and low payout ratio is the way to pick stocks.