How India's Top Dividend Paying Stocks of Today Could Disappoint You Tomorrow

Dividends can be an excellent source of income. Especially in this volatile market, when stock prices are not rising.

Usually, Indian investors assign a higher value to high dividend-yield companies. That's why more than 70% of companies (from the BSE 500) pay a dividend every year.

And why not? Divided paying stocks do have a certain appeal to them. After all, when fixed deposit rates are so low, high dividend yield stocks seem great in comparison.

Moreover, dividends are deposited directly into your bank account. So for investors, these direct payments not only serve as a source of income but also a source of relief.

But keep in mind that dividends are only sustainable to the extent a company's earnings are sustainable.

If for some reason, earnings were to decline, these high dividends of today may count for nothing.

Usually, in such scenarios, dividends disappear. As companies pay dividends from their profits after paying for capital expenditures, debt repayments, and working capital.

And so, even a dividend paymaster can become a dividend dud.

So, with this in mind, we highlight some stocks that can get affected.

#1 BPCL

First on our list is the oil major, Bharat Petroleum Corporation Limited (BPCL).

India's second-largest refining and marketing company by volume, BPCL operates two large refineries in the country located in Mumbai and Kochi. The company also has a 12.5% stake in Petronet LNG and a 22.5% stake in Indraprastha Gas - the city gas distribution monopoly in Delhi.

The company ranks high on the list of the top dividend-paying companies in the country, with a five-year average dividend yield of 4.5%.

However, in the financial year ending March 2022, BPCL paid a dividend of Rs 16, amounting to a 4.8% dividend yield. These came on the back of higher profitability reported by the company.

But the profits leading to high dividend payouts are unlikely to sustain. The huge marketing losses will offset any higher refining margins borne by the company. Moreover, the inventory hit due to an excise duty cut will also dampen the profitability further.

In such scenarios, companies are likely to cut down their discretionary spending, including high dividend payments.

Therefore, unless crude prices cool off or there is a hike in retail fuel prices, BPCL will be under increased pressure from all corners.

For more details, check out BPCL's financial fact sheet and quarterly results.

#2 IOC

Next on our list is the Indian Oil Corporation (IOC).

IOC is the second largest player in the domestic petrochemical market in the country. The company owns and operates 11 of India's 23 refineries with a combined refining capacity of 80.7 MTPA.

The company, much like its peers in the oil and gas sector, also paid a high dividend in the financial year ending March 2022. The dividend per share of Rs 11.4 amounted to a dividend yield of 15.7%, far more than its 5-year average dividend yield of 5.3%.

The high dividend payment was a reward for the shareholders, a way to share the supernormal profits generated by the company in the financial year 2022.

IOC reported record-high gross profit margins and turned last year's loss into a massive gain.

But considering the profits in the near term are likely to recede, the high dividend payments may not continue.

The marketing losses on petrol, diesel and LPG bore by the company will offset the gains in the refining segment. Also, the one-time inventory hit due to an excise duty cut will further affect profitability.

Therefore, in the wake of this, IOC might clamp up on its high dividend payments.

For more details, check out IOC's financial fact sheet and quarterly results.

#3 Tata Steel

Third on our list is Tata Steel.

The company is in the business of mining, manufacturing steel, and selling finished steel as well as value-added products and solutions. It clocked a total sales volume of over 33 Million Tonnes per annum (MTPA) in the financial year 2022.

The Tata group's steel arm distributed a hefty dividend of Rs 51 per share, resulting in a dividend yield of 4.7% in the financial year 2022. This number was higher than its 5-year average dividend yield of 2.5%.

The financial year 2022 was remarkable for the steel industry, where the entire sector reported its best financial performance. All of this was led by an upswing in the steel cycle, allowing steel companies to scale their businesses.

Tata Steel's revenues jumped by 55% in the financial year 2022 while expanding profit margins to 26% (in comparison to 18% during the same time last year). This stellar performance trickled down to high dividend payouts.

As rosy as its performance has been, it is unlikely to continue in the near term.

While volumes are to fall sharply due to the imposition of export duties on exports, higher costs will dampen the profitability. Hence, there is a good chance the company may roll back its liberal dividend policy.

For more details, check out Tata Steel's financial fact sheet and quarterly results.

#4 JSW Steel

Fourth on our list is JSW Steel.

JSW Steel is among India's largest steel companies. The company boasts an annual sales volume of 18 MTPA.

The company's revenue has grown at a CAGR of 17.2% in the last five years led by capacity addition, growing domestic economic activity, and rising steel prices. The profits have grown at a CAGR of 42% over the same period.

The steel major rewarded its shareholders generously, distributing a dividend of Rs 17.2 per share. This hefty payout amounted to a dividend yield of 2.8%, twice as much as its 5-year average of 1.2%.

Much like its peers, the company enjoyed a stellar run in the financial year 2022. The total revenues were up by a whopping 81%, compared to the same period last year, while the profits jumped by 1.5 times.

However, this streak is unlikely to continue into the following year. The rising cost pressures and lower volume growth are most likely to affect the company's profitability.

These headwinds can bog down the liberal dividend payouts henceforth.

For more details, check out JSW Steel's financial fact sheet and quarterly results.

#5 Power Grid

Last on our list is Power Grid. Power Grid is India's largest power-transmission firm. It owns and operates 173,243 circuit km of transmission lines and over 300 electrical substations.

In the financial year ending 2022, Power Grid issued a special dividend for its shareholders. This special dividend was in addition to its regular dividend, taking the total dividend to Rs.14.8 per share. The total outlay resulted in a dividend yield of 7%, much higher than the five-year average of 4.1%.

Apart from regular dividends, sometimes a company can issue what's known as a special dividend. Special dividends are a simple way to return the extra money to shareholders every few years.

These types of dividends are not usually recurring in nature. So, there is a good chance that Power Grid may not pay the same amount in the following year.

However, Power Grid has been increasing its dividend payments gradually. The dividend yield has been rising, from 2.7% to 7% in the last five years.

For more details, check out Power Grid's financial fact sheet and quarterly results.

In conclusion...

High dividend-yielding stocks may be a great starting point to spot value bargains. However, you must never invest in a stock based on its dividends alone.

Dividend payments, a discretionary item, are highly dependent on a company's earnings and the management policy. And both these factors can change.

Moreover, even though a stock's dividend payouts may have been high, investors can still lose money due to fluctuations in stock prices.

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...