As the dividend season draws to a near close, for those investors who had been chasing stocks for dividend earnings, it is a time of stock taking as to whether it was a worthy strategy.. It is true that investing in high dividend paying companies is sensible since dividend paid is tax free at the hands of the investors, but what should be given greater importance is preservation of capital. If a company consistently pays high dividend, that is a reflection of its financial health and this could also indicate its future growth potential.
In earlier days, investors took a fancy for the MNC stocks because of their generous dividend payouts. But the domestic companies had caught up with them and the liberal tax treatment could be another reason for the large payouts since in many of the companies, the promoters’ shareholding is substantial.
Many investors assume that the percentage of dividend declared is per share basis and not on the basis of the face value of shares. The dividend announced is on the assumed face value of share of Rs 10. For instance when Hero Honda announced 950 per cent dividend, it was not Rs 95 per share, as it would have been if the share’s face value is Rs 10. But it is Rs 19 per share since the face value of Hero Honda’s share is Rs 2. To Hero Honda’s credit, it should be said that it made clear the dividend amount per share and face value of the share in its published results. With face value of shares ranging from Re 1 to Rs 10 and in some cases even Rs 100, it may be time for SEBI to tell all the companies emulate the example of Hero Honda.
While the tax free status of the dividend definitely makes them a big draw, that alone does not make investment sense if one takes into consideration the actual investment yield. For instance, Punjab National Bank (PNB) had paid a dividend of 130 per cent (Rs 13 per share of Rs 10 face value). At current prices, 100 shares of PNB would cost about Rs 50,000 and for 100 shares, the dividend received would be Rs 1,300, which works out to a yield of a mere 2.6 per cent. (13 divided by 500(share price) x 100). There are traditional favourites for high dividends – the PSU banks, the PSU oil companies, other public sector companies, MNCs, FMCG companies etc. The PSU companies pay high dividend because the majority shareholder happens to be the Government. But the continuous increase in crude oil prices and the un-remunerative local retail petro prices have eroded the profitability of the PSU oil giants – IOC, BPCL and HPCL and the dividend declared this year by them is just a fraction of what they used to pay. It would be wise for an investor to spread the risk while hunting for high dividend payers. Instead of investing in a few high value stocks that pay substantial dividend, it would make investment sense to opt for a basket of mid-value stocks across different segments that pay reasonable or same dividend. For example, Asian Paints (share FV Rs 10) that trades around Rs 1,240 a share, paid a dividend of Rs 17/share. Balmer Lawrie, which had an EPS of Rs 53.37, paid the same dividend but its share quotes around Rs 400 (face value Rs 10). If one invests in the latter the same amount as in Asian Paints, his dividend income is three times more. External factors also could undermine a stock’s value. Dredging Corporation of India, which was believed to be main beneficiary of the Sethusamudram ship canal project, saw its value skyrocket to Rs 1,300 + levels (year’s high). But it has been steadily on the decline and has come now to Rs 500 + levels after the project was caught in controversy. Though a good dividend play, the stock is not expected to improve till the picture becomes clear about the future of the project and it would be risky for the investors to take a bet on it.
Mr Hitesh Agrawal, Head-Research, Angel Broking, Mumbai, says that investing in high dividend yield stocks is one of the strategies adopted by a section of the market participants and “there is nothing inappropriate” in it as far as the fundamentals of the company are thoroughly researched. But in the ongoing market meltdown a large number of even high dividend paying blue chip companies had lost a significant percentage of their share value and even if these companies had paid huge dividend, it would not compensate the loss sustained by the investors. Chasing dividend paying stocks is not for the faint hearted and investors should dig into the stocks and hold on to them during their ups and downs to ride out the storm.
As Mr Agrawal says, only if the fundamentals of the company were sound, the investors should consider them for their high dividend yield.
