The stock market is gripped by fears of a slowdown in the economy— and the future is looking bleak for equity investors. A high inflation rate, the runaway rise in food prices, the credit squeeze in the US economy and rising interest rates don’t bode too well for the stock market over the near term. Many investors are now looking for a safe haven for their capital. But remember: it’s only during such market downturns that investors can lap up some of the best undervalued stocks. In this market, among the best gauges of stocks that are trading at a discount to the market is the dividend yield.Dividends are profits that companies distribute to their shareholders; they also allow investors to get regular returns from their investments. With the stock market looking down, dividend yielding stocks can provide a good cushion for investors. These stocks usually trade at a discount to the rest of the market, which makes them attractively-priced. Investors can consider stocks with a dividend yield of at least 5 per cent, which is higher than the Sensex’s dividend yield of 1.25 per cent.
But before you go in for a dividend strategy, you must consider a few fundamental aspects of companies. Invest in only those companies that are in a position to sustain their dividend payouts over the coming years. Therefore, investors must seek companies that have good cash-generating businesses as well as the ability to grow their businesses. This can result in substantial capital appreciation when the market turns.
On the flip side, investors must also be careful of the dividend trap. Some companies may not be able to maintain their dividend payouts over the long term due to their weak financials. This will reduce the yields in future. Besides, it can also lead to a drop in stock prices of such companies, which can negate all the gains from dividends. That is why it’s important to assess a company’s financial health before investing in it.
Dividends are tax-free in the hands of investors. So, if a company has a yield of, say, 7 per cent, it’s equivalent to a yield of 10 per cent on taxable fixed deposits.
Investors looking at a dividend strategy can, with a good portfolio of high-dividend paying stocks, use it to maximise their cash flows. Here are a few dividend yielding stocks that look good for the long haul.
The banking sector has been grappling with issues such as a rise in delinquencies. But in the first quarter of 2008-09, Andhra Bank reported a dip in its gross non-performing assets (NPAs) to 1.15 per cent, compared to 1.51 per cent in the first quarter of 2007-08. Over the next few years, loan growth is likely to be restricted but the banking sector will benefit from a rise in yields on assets due to the rise in interest rates. Then, Andhra Bank has managed to reduce its cost of deposits in the first quarter to 6.2 per cent compared to 6.5 per cent in the first quarter of 2006-07. As a result of this and also judicious asset management, the bank should be able to maintain a decent growth in profits.It has maintained a stable dividend payout over the last couple of years, and its current yield is 7.1 per cent.
On the back of rising crude prices, petroleum product manufacturers have been raking in profits. Chennai Petroleum has enjoyed above average refining margins, which is why, in 2007-08, it notched a profit growth of 98.6 per cent to Rs 1,122.9 crore. In the coming months, refining margins may fall as oil prices cool down, but the refiner should be able to maintain its profitability as it expands the capacity of its Manali plant through de-bottlenecking at a cost of Rs 134 crore. Besides, a shortage of refining capacity globally should keep Chennai Petroleum’s cash registers ringing. The company’s refining complexity is among the highest, which means it can refine heavier crude that is much cheaper, which will help keep its margins buoyant. At the current price of Rs 266, the stock carries a dividend yield of 6.4 per cent, making it a good defensive play in this lacklustre market.
While the kitchenware segment has many small and regional brands and plenty of competition, Hawkins Cookers has carved a dominant share for itself in the marketplace. Its Futura brand of non-stick cookware has been a success even as Hawkins tapped organised retail chains to penetrate the market and expand its business. More importantly, the company’s brands have an excellent brand recall among customers.
Besides, rising disposable incomes in the hands of consumers have helped the company post a stellar 19.8 per cent compounded annual growth rate over the last three years. It clocked revenues of Rs 221 crore and profits of Rs 17.81 crore in 2007-08. Hawkins has also steadily increased its dividend payout from Rs 1.59 crore in 2004-05 to Rs 5.29 crore in 2007-08. Its stock is discounted by 8.56 times at its current price of Rs 167. At current prices, the stock will give a dividend yield of 6 per cent.
This software company operates in three major areas—business process outsourcing, IT services and products. The company had a muted profit growth last year due to a dip in the performance of its BPO business and the lacklustre performance of its IT solutions business. However, its new initiatives should provide opportunities in the coming years.
This Tata group company is a major producer of pig iron, which is used in the manufacturing of steel and steel products. It has been growing at a robust 56.6 per cent compounded annual rate over the last three years on the back of a major boom in the construction and infrastructure sectors. Now, this company is moving up the value chain by foraying into pipe manufacturing, for which it has planned an investment of Rs 150 crore. Tata Metaliks is also increasing the output of value-added products to improve its realisations.
Another profitable avenue has been its business of ferrous engineering and auto castings. The company has a good dividend track record, and at the current price of Rs 139, the dividend yield works out to 5 per cent. For investors, this stock is a good long-term buy.
Mid-sized pharmaceuticals company Wyeth manufactures a whole range of therapeutic drugs such as anti-infectives, hormone therapy drugs and vaccines and is a leader in oral contraceptives, depilatory cream segments and folic acid. Besides, this company has a strong parent in the $18-billion (Rs 77,400 crore) Wyeth, US, which continues to focus on new drug launches. In India, its products command a premium in the market. In 2007-08, the company clocked a net profit of Rs 81.48 crore, a handsome margin of 21.8 per cent. Besides, Wyeth also has an extremely strong balance sheet and plenty of cash in its books—Rs 229 crore. The company has been a consistently high dividend payer over the years. At the current price, the dividend yield works out to 6.8 per cent.