If You Like Dividends You Should Love These 3 Stocks

Trading and investing, especially long-term investing, can be very challenging to most retail investors. After all, the world of investing changes quickly.

Despite these challenges, the Indian retail investor has faced them confidently ever since the covid crash of 2020.

The new all-time highs made by the market are a source of encouragement. But even during corrections, retail investors have not abandoned the market. The funds keep flowing in, either via direct investments or via mutual funds.

There is a good reason for this stability and it's often underappreciated: Dividends.

Dividend stocks have provided stability to their portfolios during the volatile periods of 2022 and 2023. This in turn has helped bring in more money into the market. This stability has proven the importance of dividends to investors in a volatile market.

During the recent period of high inflation, dividends have provided investors with a steady income and a moderate return on their investment.

Dividends also provides an incentive for companies to increase their earnings, so they can pay an even higher dividend next year. This attracts more investors which takes the company's share price higher.

This is why dividend paying stocks have been shown to have higher returns than non-dividend paying stocks over long periods of time.

Even the father of value investing Benjamin Graham agreed when he said...

• The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.

If you like receiving dividends, these are the top 3 stocks that you should have on your watchlist...

#1 ITC

ITC is a diversified conglomerate with businesses spanning fast moving consumer goods, hotels, paperboards and packaging, agri-business, and IT.

The company is the country's leading FMCG firm and the market leader in the Indian paperboard and packaging industry.

In the agri sector, it's acknowledged globally as a pioneer in farmer empowerment through its wide-reaching agri business. In the hotels segment, it's a pre-eminent hotel chain in India.

For years, ITC was planning to gradually shift towards an asset-light model in the hospitality sector for further expansion. Now these words have been put to action with the hotel business demerger plan.

Over the last decade, ITC has successfully created an array of strong brands which are either #1 or #2. They are market leaders in their respective categories.

ITC has always been considered as an attractive dividend play. Right from humble beginnings in 1994, the company has rewarded investors with a higher payout compared to its peers.

This is the one thing that makes ITC stand out. Over the years, the company's management has laid out a flexible capital allocation policy. It has said that dividend payouts will be stepped up to about 80-85% of its post-tax profits.

In financial year 2022-23, ITC paid out Rs 15.5 per share as dividends. ITC has been paying dividends since 1994 without missing a single year in between.

ITC's dividend payout ratio in financial year 2022-23 was almost 100%. The company has come a long way in increasing its payout. Between 2003 and 2009, the company had a modest payout ratio ranging between 30-40%.

The company's 5-year average dividend payout ratio is 84.8% and its current dividend yield is 3.3%.

In January 2024 the company paid an interim dividend of Rs 6.75 per share.

For more details, check out the ITC company fact sheet and quarterly results.

#2 Hindustan Aeronautics

Hindustan Aeronautics manufactures and maintains aircraft and helicopters for the Indian Airforce, Indian Army, ISRO, Indian Navy, and Indian Coast Guard, among others.

Defence stocks in India have garnered significant interest for quite some time now. In a groundbreaking milestone, the Indian defence sector scaled new heights, surpassing a significant milestone of Rs 1 trillion in the total value of defence production.

The company was at the forefront, taking on as many orders as it could which resulted in a substantial spike in revenue.

It has also set up a Rs 2.1 bn Integrated Cryogenic Engine Manufacturing Facility (ICMF) that would cater to the entire rocket engine production under one roof for ISRO. This will eventually result in higher profits for the company.

HAL also completed a stock split in September 2023 where it issued shares in the ratio of 1:2.

Since 2008, the company has declared regular dividends. In the financial year 2023, the company declared a final dividend of Rs 55 per share, with a dividend payout ratio of 31.5%.

The five-year average dividend payout ratio stands at 33.8%. The current dividend yield is 1.4%.

In February 2024 the company paid an interim dividend of Rs 22 per share.

To know more, check out Hindustan Aeronautics company fact sheet and quarterly results.

#3 Dr Reddy's Laboratories

Dr Reddy's Laboratories is an Indian multinational pharmaceutical company based in Hyderabad. It manufactures and markets a wide range of pharmaceuticals in India and overseas.

The financial year 2023 was one of the best years for Dr Reddy's Laboratories. The company's revenue came in at Rs 245.9 billion (bn) and grew by 15% on a YoY basis. The growth was mainly driven by new product launches, partly offset by price erosion.

Its total net profit more than doubled and grew by 107% on a YoY basis to Rs 45.1 bn. The increase was driven by new product sales with higher gross margins, higher government incentives, and favourable foreign exchange.

It launched 10 new products during the quarter and 94 new products during the year across various countries of emerging markets.

The company closed the financial year with double-digit top-line and bottom-line growth, with earnings before interest, tax, depreciation, amortisation (EBITDA) and return on capital earnings (ROCE) margin exceeding the 25% levels.

Dr Reddy's diversified global presence, capability, and strong balance sheet make it a partner of choice for various business partners.

In the financial year 2023, the company declared a final dividend of Rs 40 per share, with a dividend payout ratio of 14.7%.

The final dividend for 2024 should be announced at the time of the annual results.

The five-year average dividend payout ratio stands at 19.3%. The current dividend yield is 0.7%.

To know more about the company, check out the Dr Reddys Laboratories fact sheet and quarterly results on our website.

Conclusion

Dividends are the lifeblood of many investors. They're can help offset inflation and even provide an income during retirement. These stocks are also considered to be a good buffer for one's portfolio during times of market volatility.

Dividend stocks weren't very popular up to 2021 but lured by the prospect of steady income during a period of high inflation, these stocks have regained their popularity.

Companies paying out a slice of their earnings to shareholders typically have a record of strong profits. This gives an incentive to the company to maintain the dividend payments in the future.

Dividend stocks also have the potential for value appreciation. They can thus bring a dual benefit in the long run. This provides an additional way to beat inflation. Not only does the stock provide income during inflation but the stock price appreciation can also help offset inflation.

If you want to dig deeper into dividend investing, use Equitymaster's powerful stock screener to check high dividend yield stocks and dividend growth stocks in India.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...