Best Dividend Stocks in India: Many investors purchase shares with the primary objective of earning profits and eventually, make a regular income from their investments. However, the income earned from investing, better known as ‘Income from Capital Gains’ is not the only thing that investors earn. Companies pay ‘Dividends’ as well to investors and this is something else that they are concerned about apart from profits made from the sale of shares and securities. Dividends are a form of capital appreciation being only a secondary consideration, and hence for investors, dividends play a crucial role in their investment choices and calculations.
Dividends refer to a portion of net profits that companies distribute to their shareholders from time to time. The payment period varies between different companies as some pay dividends on a monthly, quarterly, and even on an annual basis. The Board of Directors makes these decisions after getting approval from the shareholders. Hence, this is why dividends play an essential role in an investors’ decision-making, strategies, and future investments.
Companies also choose not to pay dividends if they don’t wish to, and there are no laws that state that every company must do so. If they are not paying dividends to shareholders, they can reinvest all their profits back into the business for expansion. Developing the company and helping it grow can lead to higher profitability, which will increase the value of shares as well as that of the shareholders.
What are Dividend Stocks?
Dividend Stocks can be defined as the shares issued by publicly-listed companies to the shareholders on a regular basis. The public companies that offer regular dividends are known to be well-established and have a good record of allocating earnings to their shareholders. An example to understand the concept of dividend stocks can be illustrated by a simple sum.
Let us take the example of a company, ABC Ltd., and an investor owns 10 shares of that company’s stocks. ABC Ltd. pays dividends of Rs. 200 per share annually to all their shareholders. Hence, the dividend earned by the investor would be Rs. 2,000 per year.
Dividend stocks are considered to be very safe investments as investors know it is a fixed income earned. This also boosts the confidence of investors as they know reliable and reputed companies have a lot of growth prospects, which would ultimately increase the value of their stocks. Investing in dividend stocks has its own demerits also, which will be disclosed below.
| Advantages | Disadvantages |
| Provides regular income to shareholders | Such stocks are usually very expensive and the returns can be great only if shares are bought in large quantities. |
| Provides protection against bad and volatile markets | Issue of Dividends are not contractually obligated by companies and hence, they can reduce dividends, or avoid paying them if they wish to. |
| They are less risky as they are issued by large and reputable companies with significant scope for growth | Dividend stocks do not completely provide capital gains for investors since the unit value of large-cap stocks does not fluctuate much in the stock market. Hence, they are not very ideal for short-term investment |
Important factors to verify in Dividend Stocks
1. First off, it is imperative that the investor has thorough knowledge about the company, its sector, and its dividend policies. The research also includes the stock’s performance, both in the short-run and long-run. Sometimes, different sectors can have different reactions to economic news pertaining to that sector, and hence, even a single piece of news can lead to fluctuations in the industry, affecting dividend payouts. Hence, a financially sound and strong company with a robust corporate governance framework, sustainability, and compliance with regulatory frameworks should be chosen.
2. Companies that are paying good dividend payouts even despite having a large amount of debt should be thoroughly checked and possibly, even avoided. This is because many companies pay dividends using debt, just to increase the value of their stocks and keep them consistent. The company is only stable if it has a low debt-market cap ratio. If it increases, then it is not a good bet, as in the long run, debt will impact the growth prospects and profitability of the company. All this will ultimately affect dividend payout.
3. Investors need to look into companies that pay consistent dividends. This means that the company is growing and has long-term stability.
4. Investors should look into the dividend payout ratio as well. The payout ratio refers to the company’s capacity to support dividend payouts. Mathematically, it is calculated by dividing the dividend per share by the company’s Earnings Per Share (EPS). If the ratio is more than 1, it indicates that the company is paying more dividends than its earning capacity, which can be questionable in the eyes of investors.
5. The total return is another important factor an investor needs to assess. This refers to the capital gains plus the dividends paid. For example, if an investor pays Rs. 10 for a stock and it increases in value by Rs. 1 and pays a dividend of Rs. 0.5, then the Rs. 1.5 gained by the investor is equivalent to the 15% total return.
6. Investors need to look at the P/E ratio as well. The P/E ratio is calculated by dividing a company’s share price by its EPS. This can be used with the dividend yield to determine if a stock is being fairly valued.
7. Finally, while selecting dividend stocks, it is important that investors don’t base their decisions only on high dividend payouts. Many companies may not deliver on that effectively and the high payout could just be bait to attract shareholders. Hence, investors should scrutinize the annual reports of the company and look for details on the consistency of dividend payouts, the profits, growth rate as compared to previous years, and debt position of the company before making a decision.
Dividend Yield
Dividend Yield is the ratio of dividend paid per share to its current market price. The mathematical formula to calculate Dividend Yield is:
Dividend Yield = Cash Dividend per Share / Market Price of Share * 100
Dividend Yield is always expressed in percentage form and the overall dividend yield should be above 3%. This shows how much a company pays out in dividends each year relative to its stock price. And also, the company should have a dividend payout ratio of at least 40%. It refers to the proportion of earnings paid out as dividends to shareholders.
Considering the factors of choosing dividend stocks, investors should not be drawn towards stocks that have high dividend yields. They can be misleading sometimes. So, looking into the consistency of dividend payouts as well as the overall stability of the company is important. Only then, it will give a clear picture on how much dividends can be expected, the reliability of the dividend, and also any red flags that investors need to be alert of.
How to Avoid Falling for a Yield Trap?
1. Avoid buying stocks solely based on dividend yield. Companies that have a significantly higher dividend yield can point to signs of trouble, rather than opportunity.
2. Study the balance sheet, income statement, debt position, as well as other details regarding the assets and liabilities of the company,
3. Use the company’s dividend history (both payout growth and yield) as a guide
4. Use the payout ratios to assess a dividend’s sustainability.
5. Check the size of the company and evaluate its growth.
Top Dividend Yield Stocks as of March 2021
| No. | Company | Sector | Market Cap (In Rs. Crores) |
| 1 | Bajaj Auto Ltd. | Automotive | 1,20,738 |
| 2 | GAIL (India) Ltd. | Energy | 72,711.31 |
| 3 | Hindustan Zinc Ltd. | Mining | 1,45,372 |
| 4 | SJVN Ltd. | Power | 11,533.95 |
| 5 | ITC Ltd. | Conglomerate | 2,55,901 |
Bajaj Auto Limited
Bajaj Auto Ltd. is an Indian automotive company which is a part of Bajaj Group. Over the years, the company has established a huge market presence globally in the two-wheeler and three-wheeler manufacturing sector. The company is by far India’s largest motorcycle and three-wheeler exporter, and they have been able to achieve this without relying on a single demography of customers. Looking at the dividend segment, the company is a high dividend payout stock, indicating that it has been paying over 40% of its net profits as dividend consistently. The company’s key financial details along with the stock and dividend details are given below.
| Revenue (FY20) | PAT (FY20) | Return on Equity (FY20) | Total Equity (FY20) | Stock Price (As of 11th June, 2021) | EPS | P/E Ratio | Dividend Payout Ratio (FY20) | Dividend Yield (FY20) |
| 31,443.22 | 5,211.91 | 24.06% | 21,662.09 | 4,172.20 | 167.85 | 24.86 | 66.63% | 3% |
GAIL (India) Limited
GAIL Ltd. is an Indian natural gas transmission company with a total market share of 70%, owing to its largest pipeline covering 12200 kms. The company has been working towards increasing the share of natural gas in the overall energy mix from 6.5% to 15%. The company has also diversified into other sectors that include manufacturing of petrochemicals and LPG. On the dividends front, the company’s dividend payout ratio is only 25%, which isn’t very high, but still the stocks have a yield of 4.4%, which is a very good ratio and proves that it is still a great dividend stock.
| Revenue (FY20) | PAT (FY20) | Return on Equity (FY20) | Total Equity (FY20) | Stock Price (As of 11th June, 2021) | EPS | P/E Ratio | Dividend Payout Ratio (FY20) | Dividend Yield (FY20) |
| 74,054.85 | 9,422.05 | 19.12 | 49,355.29 | 163.70 | 13.82 | 11.85 | 25% | 4.4% |
Hindustan Zinc Limited
Hindustan Zinc Ltd. is an Indian mining company with a mined metal capacity of approximately 1.2 MTPA, and smelter capacities of 8,90,000 TPA for zinc, 205,000 TPA for lead, and 800 TPA for silver. Taking these capacities into account, the company is the 2nd largest zinc-lead miner and 4th largest zinc-lead smelter globally. Due to this, the company has been able to successfully establish a global presence in the mining industry with a market share of over 75% by volume, dominating the domestic zinc market. The company’s exports as FY20 accounted for 20% of their revenue and high operating efficiency is what has led the company towards a reduction in costs as well as high-grade zinc reserves. On the dividend front, as of FY20, the company has a very high dividend payout ratio of 102.44%, with a dividend yield of 7.09%.
| Revenue (FY20) | PAT (FY20) | Return on Equity (FY20) | Total Equity (FY20) | Stock Price (As of 11th June, 2021) | EPS | P/E Ratio | Dividend Payout Ratio (FY20) | Dividend Yield (FY20) |
| 20,495 | 6,805 | 16.88 | 40,310 | 343.95 | 18.89 | 18.22 | 102.44% | 7.09% |
SJVN Limited
SJVN Ltd. is an Indian hydroelectric power generation company. It is the largest operational hydroelectric power generation facility in India on installed capacity with an aggregate generation capacity of 2,014.5 MW and the company is currently developing projects with a capacity of 2,556 MW. SJVN’s flagship project is the Nathpa Jhakri Hydro Power Project (HPP), which has a total capacity of 1500 MW and has completed 15 years of operations. The company has a cost plus tariff structure for both operational and under construction projects, which ensures recovery of fixed charges for debt servicing as well as earning regulated returns. Looking at the dividend segment, in FY20, SJVN had a dividend payout ratio of 52% and a dividend yield of 7.84%.
| Revenue (FY20) | PAT (FY20) | Return on Equity (FY20) | Total Equity (FY20) | Stock Price (As of 11th June, 2021) | EPS | P/E Ratio | Dividend Payout Ratio (FY20) | Dividend Yield (FY20) |
| 3,097.42 | 1,655.64 | 14.05 | 11,776.07 | 29.30 | 3.61 | 8.13 | 52% | 7.84% |
ITC Limited
Formerly known as Imperial Tobacco Company, ITC Ltd. started off as cigarettes manufacturing company, until they expanded into education, FMCG goods, hospitality, paperboards and packaging, etc. The company has been able to achieve market leadership in the spices segment after the acquisition of Sunrise Foods Pvt. Ltd. However, despite achieving diversity in product portfolio, the company still has a strong customer loyalty towards their cigarette brands, which have contributed to the company’s increased profits over the past decade. ITC Ltd. on the whole has an operating margin of 34.52% with zero debts and a net worth of over Rs. 59,084 crore. On the dividend front, the company has maintained a dividend payout ratio of 50% and a dividend yield of 4.7%. Even though their dividend records seem to be high and well, the company still faces increased risks in taxation on their cigarette business and competition intense competition with other FMCG brands.
| Revenue (FY20) | PAT (FY20) | Return on Equity (FY20) | Total Equity (FY20) | Stock Price (As of 11th June, 2021) | EPS | P/E Ratio | Dividend Payout Ratio (FY20) | Dividend Yield (FY20) |
| 52,001.94 | 15,306.23 | 23.44 | 65,650.73 | 207.95 | 10.69 | 19.44 | 50% | 4.7% |
Conclusion
From this report, we know what are dividends, dividend stocks, the factors to be considered in choosing dividend stocks as well as the best companies that pay regular dividends. Investors need to keep two things in mind before choosing dividend stocks and that is to check the dividend yield of the stock and the dividend payout ratio of the company. The former should be 3%, while the latter should be at least 40%.
After reviewing the top five companies, we know their dividend payout ratios as well as the dividend yield on their stocks, which can help us understand how stable and sound the companies are. To conclude this, if investors are looking to invest in high yield dividend stocks, their total returns may not be great, so it would be recommended to invest in high return stocks, rather than high yield stocks. But, in the end, it all depends on the investors’ investment decisions and what path they wish to take in the stock market to achieve their short-term and long-term goals.
