Are You Investing in PSU Stocks for the High Dividend Yield? Beware!

Last week while browsing the internet, I came across two contradicting headlines.

'10 stocks that beat Bank FDs with dividend yield of up to 10%'.

'How India's top dividend paying stocks of today could disappoint tomorrow'.

I read both articles and formed my own opinion.

The first said you are getting double the FD rate as cash inflow every year. So it's a good opportunity.

The second spoke about how yesterday's dividend stocks may be wealth destroyers today.

The concept of dividend yield investing cannot be generalised. So let me talk about retail investors' mindset instead towards these stocks.

A few weeks ago a friend called me and asked if he could invest in REC as it offered a whopping 10%+ dividend yield.

His logic was also the same as the first article. He believed if something gives him 10% pa as cash flow, then why does he need tax inefficient FDs. After all, FDs are taxed at 20%. Dividends are taxed at 10% above Rs 1 m.

How I wish investing and making money was so easy.

But it never is.

So should you invest in dividend yield stocks?

The answer is both Yes and No.

Here are 5 PSU stocks which give the highest dividend.

The dividend yield column above is indeed fascinating. High dividend yield in excess of 6% beats FD returns. Also if you look at the valuations, all these stocks are dirt cheap.

I mean stocks like REC and Power Finance Corporation are available at P/E ratio of 2 or 3!

If I was presented this standalone data, I would definitely be a buyer. It's a no brainer.

But before you form a judgement, do look at the stock price performance over the past 5 years. I've excluded 2020 due to Covid.

Stagnant or Declining Stock Prices of PSUs in the Last 5 Years

Top 5 Dividend Paying Stocks Have Caused Huge Capital Losses

The Dividend Myth

From the table above, we see that if you invested in Coal India in 2017, 2018, or even 2019, you would have been sitting on a loss of at least 15-20%. I'm not even considering compounding.

The same is the case for rest of the PSU stocks.

While a dividend yield of 10% sounds very attractive and retail investors get swayed towards it, the bigger point is loss of capital.

Are these really fundamentally strong stocks? In all these stocks, even if you assume a consistent dividend yield of 8-9%, a 15-20% loss of capital would erode 8-10% of your capital.

You are better off just investing in a Nifty ETF.

Lot of people also tell me, at a low P/E ratio of 2-3, there is no downside.

I partially agree, but if you look at the 5 year median P/E, these stocks have always traded at these valuations.

Unless there is a major change in the way these companies operate or if you are buying these stocks at the bottom of their earnings cycle, there is no way to get decent capital appreciation.

If you would have invested in Coal India at say Rs 100-110, which was the bottom, then your money would have doubled.

But that was at an earnings bottom when there was a coal shortage and a temporary demand-supply mismatch all over the world. It's more of a trading bet rather than investment.

Coal India gave consistent negative returns over the past 3, 4, 5, and 7 years. Even after doubling from its 2020 lows. It's still below its price 3 years ago.

What should investors do?

The whole point of investing is to put money in companies which have strong management growth prospects and are available at reasonable valuations.

While PSUs have always had cheap valuations, there is a reason behind it. Unless you can take a call on those things changing for the better, why invest in them?

Also a lot of PSUs are cyclical stocks. Stocks like NMDC is more of a trading bet and not an investment. This is due to fluctuations and volatility in its earnings and stock price.

It's also wrong to paint all PSUs with the same brush. Some PSUs like defence stocks have strong runway ahead of us. However these stocks offer capital appreciation and do not provide high dividend yields.

The focus should be on buying good quality stocks which have decent dividend yield.

My bet would be a combination of MNC stocks and non PSU stocks which offer decent growth. Some of these stocks are available below their long term average valuation and also offer dividend yields of 2-3%.

These stocks would be good picks.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

PS: Yesterday my colleague and smallcap guru at Equitymaster, Richa Agrawal, was live at the One Stock Crorepati Summit. Richa talking about her favourite small-cap stock in the market. Watch the video of the event here.