Should You Buy These Mouthwatering High Dividend Stocks? - Profit Hunter by Equitymaster
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Should You Buy These Mouthwatering High Dividend Stocks?

Aug 1, 2018

Taha Merchant, Research Analyst

In these volatile markets, I wouldn't really blame you if you find yourself quite annoyed. Getting decent returns from stocks is proving highly elusive.

But there's good news too.

There's no dearth of stocks these days floating around with mouthwatering dividend yields. Many yielding even upwards of 4%-5%.

Here are some of the stocks with the highest dividend yields from the BSE500 index:

Company NameDividend Yield (%)
SJVN Ltd.8.1
Vedanta Ltd.7.1
Coal India Ltd.6.8
Chennai Petroleum Corporation Ltd.5.8
Hindustan Petroleum Corporation Ltd.5.7
NHPC Ltd.5.6
NLC India Ltd.5.4
Rural Electrification Corporation Ltd.5.3
Bharat Petroleum Corporation Ltd.5.0
Indian Oil Corporation Ltd.4.9
Oil & Natural Gas Corporation Ltd.4.9
Procter & Gamble Hygiene & Health Care Ltd.4.8
Greaves Cotton Ltd.4.8
Oil India Ltd.4.3
Bharti Infratel Ltd.4.2
Gateway Distriparks Ltd.4.0
NMDC Ltd.3.9
Infosys Ltd.3.8
National Aluminum Company Ltd.3.7
Castrol India Ltd.3.6
Data Source: Ace Equity

BSE 500 companies' dividend payout ratios - dividends as a percentage of their annual profits - hit nearly 40% in FY18. This is over double the previous year's 17%, says one report in business daily Mint.

In fact, this ratio is the highest since 23% in FY09 (the year since data is available).

If you're wondering, here is one of the reasons for this phenomenon...

Mint points out that the reason listed companies in India have handed out the biggest dividends in at least 10 years during financial year 2017-18 - ironically - is the sluggish business environment.

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The full-fledged recovery in demand and capital expenditure hasn't materialized yet, and companies are not operating at full capacity.

In fact, many companies are finding it so hard to come by investment opportunities to expand and grow, that instead they've begun paying out a higher portion of their profits to shareholders.

Corporate India is Doling-Out Larger Dividends

Nevertheless, in this volatile stock market, it's nice to get these neat little dividend cheques that go straight to your bank accounts - especially when the stock price is doing nothing for you.

Such high dividend yields are tempting...some would even say they are indicative of these stocks being bargains.

Yes, they are, but with one major weakness.

What you must remember is companies' dividends are sustainable only to the extent their earnings are sustainable.

Tomorrow, if earnings reduce, these high dividend yields of today will count for nothing.

In such cases, not only will the dividends disappear - they also won't save you from the severe crash in stock prices that will follow to reflect the company's fall in earning capacity.

The moral of this story: Though high dividend yield stocks may be a great starting place to search for deep value bargains, never pick stocks on dividends alone.

Remember, you're not looking for eggs, as much as you're looking for an egg-laying chicken.

Cheers,

Taha Merchant
Taha Merchant
Research Analyst, Microcap Millionaires

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1 Responses to "Should You Buy These Mouthwatering High Dividend Stocks?"

S.K.LIMAYE

Aug 1, 2018

Nice article and helpful advise.

Like (2)
  
Equitymaster requests your view! Post a comment on "Should You Buy These Mouthwatering High Dividend Stocks?". Click here!