10000 to 4crs in 18 months 1000rs to 50crs 300% returns 75% promoter holdings A 50 bagger A sureshot 5 bagger Analysis Another fraud? Auto ancillaries Bank sector Blind sell Brand plays Broking Bse Nse Buy calls cements Ceramics/tiles Counters I don't like Debt free businesses Delisting candidates demerger bets Disclosure- I own them Domestic consumption plays E-Commerce pick Education Exit at rallies Famous analysts Famous stocks FMCG Footwear future multibaggers Gems andJewellery Hidden gems High conviction ideas High dividend plays High potential small caps High ROE stocks Holding companies Hotel sector How they looted you.. Indian stock market Infrastructure sector Interesting Microcaps IT KPO Landbank plays largecap ideas Less than 5 PE stocks Liquor Logistics Market lessons Market outlook for 2013 and 2014 Market underperformers Meeting with the CEO Metals Monopoly businesses My 5 baggers My Favourite counters My paid stock recommendations My stock picking techniques nse bse tips Oil exploration Operator calls Paints Penny stock outlook penny stock updates Pharma sector Poultry stocks PSU Publicity freaks Real estate Renewable energy plays Safe bets Sell recommendations Share market Live shipping stocks short term call SOTP plays stock tips stock under 10rs Stocks to watch out for Strong bonus candidates Takeover candidates TATA product tea Textiles The 13 bagger The 45 bagger Trading companies Transformers Turnaround bets Tyres Uncertain/Risky business models Unique businesses

Search This Blog(Over 800 companies covered in the blog).

Archives : Old artciles

Friday, March 27, 2009

Current low stock prices offer high dividend yields

As a Spanish proverb puts it, "Habits are at first cobwebs, then cables". We have been so used to seeing the share prices go up month after month between 2003 and 2008 that investing for capital appreciation has become a habit. Even after a long year of turmoil, most investors are asking the question, "ye kitna upar jayega?" before buying shares. Investors are still not prepared to accept the reality that the bull-run is long behind us and the market is staring at a drought of good news to take it forward. This new reality requires the investors to revisit their investment rationale.The days of momentum buying (buy high and sell higher without looking at the company's finances) are over. Nor is it possible to double or triple your capital in ultra short time anymore. The froth is out and the investment world is back to its normal trajectory. Does this mean the end of the road for equities? Not really.It just means that investors will now have to change their perception about equities. While equities were traditionally bought for capital returns, they could become excellent sources of steady income during bear phases. The lower stock price translates into higher dividend per share, thereby pushing up the dividend yield to attractive levels.Right now, the market is full of low-hanging fruits where the post-tax yields are almost double those in fixed income instruments.

Rationale behind dividend approach:-The new financial year is just a week away. The beginning of the new fiscal will usher in the annual dividend season. Beginning from the middle of April, companies that follow the April-March financial year (and bulk of them do that) will start announcing the annual goodies to the shareholders. It makes sense to focus on dividends which are also incidentally tax-free in the hands of the investor. In fact, a dividend yield of 6.5% is equivalent to 10% interest earned over a period of one year, which is a taxable income.Another important aspect of dividends is that they are more stable than corporate profitability. Most companies raise their dividend payout ratios during times of low profitability instead of cutting the dividends in tune with a decline in profitability.In fact, in the Western countries, a large section of people invest solely for dividends. And a cut in dividends is considered as a fundamental degradation of a company's financials. For example, General Electric lost more than 30% of its value immediately after it announced a reduction in dividend and the shares of Citigroup dipped below $1 after it cancelled its annual dividends.

Will the dividends really come this year:-The number of dividend-paying companies in India and the total quantum of dividends would, no doubt, reduce this year compared to FY08. However, if we look back in history, a number of companies had a consistent dividend-paying record over the past 10-15 years regardless of the ups and downs in the business cycle. We also need to appreciate the fact that even the promoters of these companies depend on dividends as a source of their income.I sifted through heaps of data to identify companies that are most likely to maintain their dividend pay-outs.I only chose companies that never missed a dividend pay-out in the past 10 years, have healthy operating cash-flows, comfortable debt-to-equity ratio and haven't performed too badly in the first 9 months of the year. I excluded companies in the automobile, auto ancillary and real estate space. My list also excludes newly listed companies.

Enjoying ample legroom: A case explained:-Let's take the case of Tata Steel. Its profitability has been hit by the crash in steel prices. Being a commodity business, the steel industry is cyclical and has undergone several ups and downs in the past. However, if we look at the history of the past 15 years, the company has never missed a single dividend. Even when its PAT fell by more than 60% y-o-y in 2002, it cut its annual dividend by just 20% to Rs 4 per share.The worst of estimates predict a mere 25% decline in Tata Steel's profits in FY09. Even if the company just maintains last year's payout ratio, it would still pay Rs 12.5 per share as dividend. This is a 7.1% yield on the scrip's prevailing market price.Companies such as MM Forgings, Deepak Fertilisers, Graphite India, Tamilnadu Newsprint and Balmer Lawrie have actually seen a rise in profits in the first 9 months of FY09 over the past year. So they just need to maintain their dividend at the past year's levels to make the cut. Most of the companies in my list paid out a very small portion of their last year's profits as dividends. This provides them ample leg room to fiddle with pay-out ratio and thereby maintain dividend stability.If I broaden my search to companies paying dividends since FY 2000 - to include companies listed in 1999 or 2000 - more interesting names would crop up.At the end,I must mention that the payment of dividend is at discretion of the company management and shareholders should not treat it as their right. Nevertheless, in the current market scenario, dividend payout could and should be a compelling reason for buying shares, rather than being disappointed at the stagnant stock prices.


Important Disclaimer&Privacy policy

This blog does not share personal information with third parties nor do we store any information about your visit to this blog other than to analyze and optimize your content and reading experience through the use of cookies.You can turn off the use of cookies at anytime by changing your specific browser settings.This privacy policy is subject to change without notice and was last updated on 20.3.2013. If you have any questions, feel free to contact me directly here: Investment in equity shares has its own risks.Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that I consider reliable. I,however,do not vouch for the accuracy or the completeness thereof.This material is for personal information and am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.The stock price projections shown are not necessarily indicative of future price performance.The information herein, together with all estimates and forecasts, can change without notice.

Subscription to Arunthestocksguru

Enter your email address:

Delivered by FeedBurner