Dividend-yielding stocks are particularly favoured by investors who seek a steady source of income and a good hedge against volatility. Companies in the energy and infrastructure space rank high when it comes to dividend-yielding stocks, show data.
Dividend yield is a financial ratio that shows how much a company pays out in dividend each year, relative to its stock price. In other words, it is the amount paid by a firm to its shareholders, divided by its current share price. For example, if the dividend paid is Rs 50 per share, and the share price is Rs 500 apiece, the dividend yield will be 10%.
Assuming the dividend paid by the company is constant, the dividend yield will rise with a fall in share price, and vice versa. Independent market expert Ambareesh Baliga said these stocks are preferred as they provide a better yield than bank deposits. “Two features offered by this category are constant cash flows and capital appreciation,” he said, adding: “Companies that have good earnings visibility and cash flows are the top dividend-yielding stocks, a majority of them being PSUs.”
He pointed out that these stocks may not be the usual favourites of the market, but are generally well-established names with strong fundamentals.
As data show, in FY23 on a YTD basis, Vedanta returned a dividend yield of 16.36%, with a dividend of Rs 45 per share on the closing price of Rs 275 as of Thursday. With the exception of Vedanta, stocks with the highest dividend yield are PSUs, with REC, Coal India, IOC, and Nalco making up the top five.
“Though fixed-income instruments like bank deposits offer high interests with no risk, dividend yield stocks offer capital appreciation in addition to the dividend income, even though there is a risk element,” said Kranthi Bathini, director (equity strategy) at WealthMills Securities. He added that this is a favourite of investors with a low-risk appetite but those tilting towards equities over fixed income.
Since 2020, dividends exceeding Rs 5,000 have been made taxable in the hands of investors. This was after the finance ministry abolished the dividend distribution tax, under which companies used to pay tax on dividends before disbursing the amount to shareholders.
“This has led to only those investors with a long-term horizon remaining invested. Earlier, investors could hold a stock, earn dividend that would be tax-free, and sell the stock at a lower price to show a loss and prevent paying tax,” said Bathini. However, that has changed and disincentivised investors who wish to just make a quick buck instead of being invested on a consistent basis.
Also read: Gold hits nine-week low, next major trigger to be US Fed’s testimony; 55000-54500 continues to be good support
Among the top 15 stocks with the highest dividend yield in the BSE 500 universe, four are from the power sector, three are from oil & gas, and three from the metals & mining sector, thus showing a dominance of firms in the infra and energy space.
While high dividend-yielding stocks are attractive, investors should also understand the fundamentals of the company. Metrics such as the dividend payout ratio, which is the ratio of total dividends paid relative to the net income of the company, could help investors understand the financial health of a firm.
For example, if the dividend payout ratio exceeds 100%, it shows the company is giving out more in dividends than it is earning. This shows a high chance of dividends being slashed or stopped to preserve cash flows.