INVESTING

BENEFITTING
FROM
DIVIDENDS
CHOOSE HIGH DIVIDEND-PAYING COMPANIES ONLY
IF YOU ARE NEARING RETIREMENT be the ones to watch.
ASHISH PAI Investing in dividend-
paying stocks is not effort-
hen deciding on invest- less and investors must watch

W ment avenues in equities,

most investors think in
terms of what income will
come only by way of cap-
ital appreciation. Seldom do they think
that there are a lot of good companies that
have been paying handsome dividends
annually.
Dividends are payments
by a company to its
shareholders given
out of the profits it
makes. It is calcu-
lated as a percentage
or absolute value per share. Not all
companies pay dividends. Some plough Dividend yield of S&P CNX Nifty
it back into business, to generate returns Date P/E Ratio P/B Ratio Div Yield
in the future. Others don’t pay due to cash
flow requirements. But even after hav-
30/03/07 18.40 4.87 1.25
ing attained scale capabilities, some cap-
ital expenditure-intensive companies do 31/03/08 20.63 5.09 1.06
not pay dividend or don’t pay good 31/03/09 14.30 2.50 1.85
dividend, as they have to retain cash 31/03/10 22.33 3.70 0.94
for their own requirement. India’s largest
telecommunication company, Bharti Air- 30/09/10 25.46 3.82 1.03
tel, had huge capital expenditure in 09/02/11 20.12 3.32 1.19
the past few years, so it paid negligible
dividends to the shareholders.
In India, dividend income is tax-free in The table above clearly shows that
the hand of the recipient or the share- in spite of increased valuation of stock
holders. But, companies have to pay in terms of prices, indicated by higher P/E
dividend distribution tax (DDT), which is ratio and P/B ratio, the dividend yield is
15 per cent, plus applicable surcharge and being more or less maintained by com-
cess. Suppose a company called ABC panies over a period of time. (The only ex-
has a profit after tax of `50 crore. It has ception was on March 31, 2009, where
an equity base of `100 crore, divided in- there was a drastic reduction in market
to 100 million shares of `10 each. Its earn- prices due to a credit crisis in the finan-
ings per share (EPS) will be `5 a share. cial sector.)
If it declares a dividend of `2 per share, Dividend and market price: The
the dividend payout ratio is 40 per cent. history of dividend payment by compa-
If the market price is `100, the dividend nies may not have significant influence on
yield is two per cent. stock prices. But, consistent dividend pay-
Similar is the case for individual stocks, out may give the company good market
we can compute the dividend yield of standing, as this suggests it has the ca-
an index, say S&P CNX Nifty. The table pacity to earn profits and withstand
below provides the movement in price- cash flow uncertainty. Investors are on the
earnings ratio (P/E), price-to-book-val- lookout for good dividend-paying com-
ue ratio (P/B) and dividend yield of the panies. Such stocks provide stability
S&P CNX Nifty. and investors stand to benefit by way of
out for factors such as consis-
tency of dividend payment, long-
term value generation and a sound
business model. Capex-driven com-
panies in construction, telecom-
munication infrastructure and pow-
er are not particularly good as far
as dividend payments are concerned.
Also at times, mid- or small-cap com-
panies tend to attract investors with
high dividends but they may not be
able to maintain their dividend pay-
outs over the medium or long term.
Dividend yield funds: These
schemes predominantly invest the ma-
dividend income if a stock remains below jority of their funds in a well-diversified
purchase price for a considerable time. portfolio of companies with relatively high
Dividend coverage: This ratio meas- dividend yield, which provides a steady
ures the extent to which a company’s stream of cash flows by way of dividend.
earnings support its dividend payments. For investors not too well versed in
For companies with high dividends, stock selection, dividend yield funds
the dividend coverage ratio will be are a better option to invest in. Some
lower as compared to low dividend of these and their performance are
paying companies. given below:
Dividends and companies: Compa-
nies paying good dividend and having good Dividend yield funds’ performance
cash flow are more stable, safer and Scheme Name NAV (`) Div
per unit
can give an additional income along
with capital appreciation to enhance your Birla Sun Life Dividend Yield 13.25 0.7
investment income. However, there Plus-Plan A (Dividend)
may be a decline in dividends when the Tata Dividend Yield 18.52 1.5
economy is under strain or the company’s Fund ( Div)
profitability is under pressure and it is not
UTI Dividend Yield 13.74 0.5
sure about its future cash flows. Even dur- Fund(Income)
ing market slowdown, companies that
have managed their cash flows well should Principal Dividend Yield 15.77 Nil
Fund-Dividend Plan
Stocks with a good dividend yield
Scrip Market Div per Div High dividend stocks are good in-
Price* (`) share (`) yield (%) vestments for any age group, but it
BHEL 2,043 23.3 0.0114 holds particularly true for individuals near-
TCS 1,095 20 0.0183
ing retirement or ones with irregular
income. By careful selection of stocks, you
Syndicate Bank 103 3 0.0291 may not only increase your dividend in-
Castrol 397 12.5** 0.0315 come from them but also capital appre-
Vijaya Bank 77 2.5 0.0325 ciation if you choose good ones in
this category.
Merck 601 95 0.1580
The writer is a certified
*As on Feb 10, 2011; **Ex Bonus (1:1) dividend a share financial planner