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Dividend Stocks revisited

May 20, 2003

It was Budget day and right here in this section, we put up an article "Dividend Stocks: For a change" . The main aim of the article was to inform our readers that it is not always prudent to invest in high-risk stocks and it does make sense to invest a part of your portfolio in these offbeat stocks, if one may call them so. Dividend stocks may not give astounding returns within a short span of time, but they definitely provide some kind of a hedge against the day-to-day volatility witnessed amongst stocks that are darlings of the market.

Not much has changed since the Budget day as far as the uncertainty in the minds of investors is concerned, regards the movement of the indices. Though the long-term growth prospects of the economy and our stock markets look promising, for some reason, this feeling is not reflected in the investor sentiments, due to which the BSE Sensex has lost nearly 12% since the beginning of 2003. Historically low valuations (11x) and the GDP poised to grow at almost 6% for the next few years (government has targeted a growth rate of 8% by 2007) provides a strong case for investment in Indian equities. Moreover, healthy forex reserves and strong export potential further strengthens this argument.

Market Price
Jan 1
Mar 1
May 14
% change since
March 1
BSE Sensex 3,377 3,284 3,027 -7.8%
Dividend stocks:
PNB Gilts 24 23 22 -2.6%
Tata Chemicals 58 64 72 12.5%
LIC Housing Fin. 64 71 84 18.6%
Blue Star 74 78 98 26.6%
Index heavyweights
Infosys 4,771 4,284 2,791 -34.9%
HLL 182 169 148 -12.4%
Reliance 298 294 269 -8.5%

However, in this article we revisit the behaviour of a few dividend stocks since the Budget day. In Budget 2003-04, the Finance Minister announced that dividend tax in the hands of the investors has been done away with. In line with expectations, 3 out of the 4 dividend stocks (covered in our previous article) have managed to outperform the indices in a big way, which is clearly visible in the table above. The story is similar for other dividend stocks like Rallis India (10%), Chambal Fertlisers (7%) and GE Shipping (22%) to name a few.

Dividend stocks, though primarily a story of dividends, sometimes have a surprise element in store for investors in the form of capital appreciation. This is precisely what happened to the stocks under consideration, barring PNB Gilts. While PNB Gilts lost less than 3% since the announcement of tax-free dividends, Tata Chemicals (13%), LIC Housing Finance (19%) and Blue Star (27%) managed to gain ground. This is a commendable performance when compared to investor favourites like Infosys (-35%), HLL (-12%) and Reliance (-9%), which lost considerable ground.

However, at the same time, we continue to maintain the stand that investing in a dividend story is not just about the dividend yield of the stock. It is also about the company, its management, the business model and fundamentals of the company. The dividend history of the stock is a good indicator of future dividend declarations by the company. However, there is always the likelihood that the dividend declaration trend might not continue or dividends may be curtailed down.

In conclusion, it can be said that whether there is a tax on dividends or not or whether the stocks markets will be northbound or southbound, part exposure to high yield dividend stocks is always likely to assure the investor of a steady income. Not to forget the built in surprise element!

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