Highest Dividend Paying Stocks in India (2024) for Long Term Investment

The year was 1920.

A banker named Mr Munroe spotted an unusual opportunity. He wanted the depositors to earn more than what the bank's deposits could offer them. And the 50% crash in the stock price of Coca Cola presented the opportunity of a lifetime.

Mind you, this was just a year after the stock of Coca Cola had listed and well before Warren Buffett recognised its moat.

A conflict with the sugar industry caused the stock price of the beverage company to come crashing down. The company had sufficient profits, return ratios, and cash flows. However, the stock was trading less than the cash per share. So you would think this was a great case of shrewd value investing.

But it was not Mr Munroe's value investing skills that made him famous. The banker did encourage his depositors in the town of Quincy, Florida, to buy the stock of Coca Cola. But what he convinced them of was the benefits of its dividends.

True to his word, the farm town was relatively unaffected during the Great Depression. And it was the Coca Cola dividends that supported the local economy when the farm income dried up.

Later, Quincy became the richest town in terms of per capita income in the entire United States.

Thus, the story of Coca Cola dividends goes far beyond the merits of the company's moat, financial strength, and management quality that Buffett has made famous.

Investing in dividend stocks is not just about fetching some returns in times of stress.

On the contrary, if done smartly, dividend stocks can make your portfolio returns look better than you could ever imagine. That too across market cycles!

Earnings May be Human, but Dividends are Divine

High dividends cannot be the sole reason you to buy a stock. You have to ensure that you buy the right kind of business.

Nothing tells you about the sustainability of a business better than a company's track record in paying dividends over a long period of time. While earnings can be manipulated and are therefore less trustworthy, dividends indicate good corporate governance. Plus, consistent growth in dividend payouts is the best yardstick to measure the management's commitment to creating shareholder wealth.

In other words, as with the Coca Cola dividends, you would want to be invested in companies that can offer you some returns even while passing through economic depressions, cyclical downturns, and periodic shocks.

But dividends are not just your friends for bad times. In good times, a handsome dividend receipt can be the icing on the cake!

For countries like India, where inflation has been on average much higher than in the West, dividends make it that much easier to earn inflation-adjusted returns.

The returns on fixed deposits here have rarely managed to offer real inflation adjusted income in recent years. But if the returns on a safe stock are topped with a healthy dividend yield, beating the inflation number by a wide margin is not impossible.

Now, you may have great companies that are growing very fast, but they are not willing to pay out dividends. And if the valuations are right, there is no reason to ignore such companies.

But going by the track record of cash-rich companies going overboard with their expansion or acquisition plans, one cannot be too sure of the cash flows being put to the best use.

The absence of dividends, therefore, does not assure that the company will grow fast enough to compensate with returns.

There are a few outliers though, and one can find some mouth-watering yields during market corrections.

However, keep in mind that, if a company is indeed growing its earnings fast enough, a consistent dividend yield between just 1% and 3% can add up to a mind-boggling return over a period of time.

But there is a catch...

You cannot invest in companies trying to lure investors with high dividends sourced from borrowed funds. In other words, dividends and the growth in payouts must come from the company's internal cash flows. Stay away from leveraged companies paying high dividends.

Instead, look for companies that can consistently earn more for every rupee invested. Entities that do not need to constantly invest in the business and have healthy margins, sufficient pricing power, and little or no debt are your best bets.

Typically, companies sporting such fundamentals dominate market share and profits. They also tend to have more new product launches and dictate the trends in their sector.

So, companies that score well on the dividend front are typically the ones that will dominate the business for years to come.

The Best Income Compounding Vehicles

An investor can make use of power of compounding by investing in such a way that interest earned in a year is added to the principle the next year. Thus, this new total is considered when calculating future interest. Follow this pattern sincerely for a few years and you will be surprised at the amount of wealth you will have accumulated at the end of the period.

If you consider the dividend receipts investors have pocketed from the best companies of the past several decades, you will see why Einstein called compounding 'the eighth wonder of the world'.

Some call the strategy of investing in dividend compounding companies 'compound interest on steroids'. This is because the interest rate, rather than being fixed, grows year after year - an investor's dream.

Reinvested dividends fetch higher dividends the next year and continue to do so every year thereafter. This generates much higher returns than an instrument that compounds money at a fixed rate. Put differently, Rs 100 compounding at a fixed rate of 5% will yield Rs 5 in the first year, Rs 5.25 in the second year, and Rs 6.1 at the end of the fifth year.

In contrast, a stock priced at Rs 100 and yielding Rs 5 in dividends but growing at 10% every year, will pay out Rs 9.2 at the end of the fifth year - 50% greater than the first case.

Of course, of the thousands listed on the bourses, there are only a handful of companies that are able to increase dividends for an extended period of time. But, if the right stock is unearthed, there is no beating the strategy of dividend compounding.

Let's get to some real life examples of companies that have offered mind-boggling returns by way of dividends alone. And continue to do so!

Companies such as Asian Paints, TCS, CRISIL, Polyplex Corporation, HUL, Nestle, VST Industries and the likes have earned the distinction of being the most consistent dividend payers for more than a decade.

Not to forget companies like Sanofi India, TTK Healthcare, Oracle Financial Services (OFSS), Hindustan Zinc, Vedanta and Coal India, which are considered as the top dividend stocks in the world!

You also have companies like Pidilite, Hawkins, Fiem Industries, GSFC, Bayer Cropscience and Ambika Cotton Mills, that have payout ratios few can match.

Some relatively lesser-known names include -

• Cheviot
• Plastiblends India
• Anuh Pharma
• Sukhjit Starch
• Bhageria Industries
• Narmada Gelatines
• Banco Products
• Styrenix Performance Materials
• Goodyear India

Remember, the power of compounding in consistent dividend growing stocks offer huge payoffs for investors who hold them long term.

Fixed Deposits CANNOT Always Be Your Income Investments

Even if you consider yourself as a risk-averse investor, fixed deposits cannot be the ideal mode to safeguard your capital and earn inflation adjusted income at all times.

The key difference between income earned through dividends and fixed deposits is that the former does not attract taxes. Plus, while interest rates can head lower even in a growing economy, it is unlikely a healthy company with growing profits will cut dividends.

The long term interest rate in India (benchmark interest rate adjusted for inflation) has averaged 7.4%. And it is very unlikely that fixed deposits will yield better than this in the foreseeable future, irrespective of the movement in interest rates.

Thus, unless you want to limit your real income to 7.4% of invested capital, you should let the best dividend stocks be the consistent income generators for you and your generations to come.

What Dividends Can Do to Your Income in 5-10 Years...

Selecting dividend stocks is not only about buying the ones that currently have the highest yields. You might end up with a dud company that has paid out an extraordinary dividend...for the benefit of promoters...in its 25th year.

It is also not about picking the ones that have a track record of dividend payments for several decades or a century. Otherwise, a bulk of the PSU enterprises that are compelled to fill government coffers will find a way to your portfolio.

And a list of the most generous dividend paying companies could very well include ones that pay shareholders despite high leverage on their books.

So to find companies that will enrich your income with dividends for 5-10-15 years...you need to look for slowdown-proof, sustainable businesses that will consistently grow dividends in the double digits. In other words, you need to make a call on the future earnings growth potential of the business.

The Growth - Yield Payoff

The Top Dividend Growth Stocks You Should Aspire to Buy

If you run a screen to look for the fastest growing dividend companies, the result throws up quite a few names with suspect future earnings growth. Besides, you have to be absolutely sure about the quality of management when investing in companies for such a long term.

So, the key criteria for selecting these dividend stocks should be business quality, management's capital allocation skills, cash flow strength, and sustained earnings growth.

When to buy - Dividend yield of at least 2%

Since the divined yield for these stocks will keep fluctuating depending on valuations, you need to invest in the stocks when the yield is at least 2%. Besides the dividend yield, the other valuation ratios, such as PEG (price to earnings growth) can help keep a check on margin of safety.

Further, since there will be several opportunities to buy these stocks during market downturns over a long period of time, there is no reason to allocate all your capital at one go.

For easy reference, we've created a separate section for dividends on Equitymaster' Indian stock screener.

Here is the list of dividend screens that'll help you right away in filtering the best dividend stocks...

• Best Largecap Dividend Growth Stocks in India
• Best Midcap Dividend Growth Stocks in India
• Best Indian Penny Stocks with Dividend Growth
• Best Smallcap Dividend Growth Stocks in India

Even though dividend-paying companies are not as volatile as growth stocks, you don't want to solely rely on dividend income from them as it can fluctuate based on market conditions. Just one instance that we can think of is in the aftermath of the 2008 financial crisis, many companies across the world eliminated their dividends while half of them reduced their dividends.

Apart from that, we are shifting into an era of growth companies... so the next time you look at a potential investment based on the dividend hypothesis, dig one level deeper. It might give you a different perspective that you had missed.

Happy Dividend Investing!

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...

Yash Vora is a financial writer with the Microcap Millionaires team at Equitymaster. He has followed the stock markets right from his early college days. So, Yash has a keen eye for the big market movers. His clear and crisp writeups offer sharp insights on market moving stocks, fund flows, economic data and IPOs. When not looking at stocks, Yash loves a game of table tennis or chess.