5 Best Dividend Yielding Stocks

Historically, the portfolio of companies that have paid higher dividend yield has performed better than the broader market equity indices. And this becomes evident from the fact that the calendar year return of these indices shows that out of 15 years of study, in 7 years, Nifty Dividend Opportunities 50 has outperformed Nifty 500. The article examines the phenomenon while also listing the five best dividend-yielding stocks [EasyDNNnews:PaidContentStart]

Let us narrate here the story of Shyam Dave who lived a carefree life in the quiet town of Jabalpur. Content with his leisurely days, Shyam found solace in the security of his investments, particularly in government bonds that earned him a modest 6-7 per cent annually. However, Shyam’s tranquil existence was soon disrupted by the well-meaning advice of his friend Jay Khote, a zealous advocate of stock market investing. Jay, eager to see Shyam maximise his returns, suggested that Shyam divest from his bonds and plunge into the world of stocks. However, despite Jay’s insistence, Shyam hesitated. 

This was because of his aversion to risk and his reliance on the steady cash flow provided by his bonds. Unperturbed, Jay presented Shyam with a list of 10 stocks boasting high-dividend yields, promising the allure of bond-like income with the potential for stock market gains. Buoyed by Jay’s enthusiasm and the prospect of higher returns, Shyam dipped his toes into the stock market waters. Initially, his foray into dividend-paying stocks seemed promising, with his portfolio boasting an impressive dividend yield of 5 per cent along with share price gain. 

Shyam basked in the satisfaction of enjoying both income stability and capital appreciation. However, Shyam’s euphoria was short-lived as troubles soon besieged his investment journey. To his dismay, he discovered that one of the companies in his portfolio failed to deliver the promised dividend. Worse still, he learned that the company was grappling with financial woes, leading to the suspension of dividend payments. Shocked by this revelation, Shyam realised the harsh reality: even seemingly stable dividend-paying companies are not immune to financial turbulence. 

There are many such Shyams who face the same fate of investing in companies whose dividend-paying capacity is not sustainable and hence all the gain made through dividend is wiped out in capital erosion or a drop in the share price. The tale of Shyam serves as a timeless lesson in the importance of diligence, diversification and the prudent management of risk. As investors navigate the twists and turns of the market, may they heed Shyam’s cautionary tale and approach their investment decisions with wisdom and discernment. If you do not have the time and resources to indulge in due diligence, we at DSIJ will help you build your dividend portfolio.
 

Dividend Yield Portfolio

Historically, the portfolio of companies that have paid higher dividend yield has performed better than the broader market equity indices. Nifty Dividend Opportunities 50 index, which is designed to provide exposure to high-yielding companies listed on the NSE while meeting stability and tradability requirements, has performed better than Nifty 500 in the long run. The performance of Nifty Dividend Opportunities 50 against Nifty 500, spanning from January 4, 2010 to April 26, 2024, exhibits superior performance across various metrics. With a total return of 392.24 per cent, it outperforms Nifty 500, which boasts a total return of 377.13 per cent. 

Additionally, the Nifty Dividend Opportunities 50 index demonstrates a higher daily Sharpe ratio of 0.80 compared to 0.76 for Nifty 500, indicating better risk-adjusted return. The daily Sortino ratio further reinforces this, with the Nifty Dividend Opportunities 50 index boasting a higher value of 1.27 compared to 1.17 for Nifty 500. Despite experiencing similar maximum drawdown, the Nifty Dividend Opportunities 50 index exhibits a marginally higher Calmar ratio of 0.31, indicating better risk-adjusted returns over the long term. Overall, these statistics underscore the superior performance of Nifty Dividend Opportunities 50, making it a more compelling investment option compared to Nifty 500. 

The calendar year return of these indices shows that out of 15 years of study, in 7 years, Nifty Dividend Opportunities 50 has outperformed Nifty 500. The returns characteristics are mixed as in some of the bad years, Nifty Dividend Opportunities 50 has performed better than Nifty 500 while during others, they have underperformed. Hence, nothing conclusive can be drawn. 

Conclusion
 

In today’s volatile market environment, income-focused investors are increasingly seeking out dividend-paying stocks. These stocks offer a steady stream of income through regular dividend payouts, providing a buffer against market fluctuations. Overall, investing in higher and consistent dividend-paying companies can be a great way to generate income, reduce portfolio volatility, and potentially benefit from long-term value creation. However, it’s crucial to conduct thorough research and understand the underlying risks before making any investment decisions. In the following pages we have given the five best dividend-yielding stocks, which we see have the potential to give you best of both, dividend as well as capital appreciation. You can invest in all or select any three based on your risk profile and your overall portfolio constituents.


Recommendations

Coal India Limited 

Coal India Limited (CIL), engaged in the mining and production of coal, also operates coal washeries and is the single-largest coal producer in the world. It boasts of several factors that make it an attractive dividend player. The company exhibits strong financial performance. In the last five years, its top-line and bottom-line have increased at a CAGR of 10 per cent and 32 per cent, respectively. The company has been earning free cash flow of more than ₹10,000 crore consistently over the past 10 years. For FY23 this was more than ₹30,000 crore. CIL reported record 773.6 million tonne production in FY24 that grew 10 per cent year-on-year. Its sales volume was at a record 753.5 metric tonnes, growing 8.5 per cent on highest-ever deliveries to the power industry in FY24. Coal India, in the coming period, targets to achieve production volumes of 838 metric tonnes and 1,000 metric tonnes for FY25 and FY26, respectively. The shares of the company are currently trading at PE of 9.67, one of the lowest in its category. 

Here is why:
◼ Consistently paying dividend since 2010 with current dividend yield of 5.32
◼ Strong cash flow and free cash flow of more than ₹30,000 crore at the end of FY23
◼ Available at attractive current PE of 9.6 times 

Balmer Lawrie Investments

Balmer Lawrie Investments Ltd. is a government enterprise. It’s a major stakeholder of Balmer Lawrie & Company. The company along with its subsidiaries is engaged in the business of industrial packaging, greases and lubricants, leather chemicals, etc. Balmer Lawrie Investments boasts several factors that make it an attractive dividend player. It exhibits a strong financial performance. The company has been earning free cash flow of more than ₹100 crore consistently in the last five years and for FY23 this was more than ₹220 crore. Financial services stocks do not always pay a dividend but Balmer Lawrie Investments pays dividends to reward its shareholders. In the quarter ending March 2023, the company has declared dividend of ₹33, translating into a dividend yield of 8.81 per cent. Nonetheless, the share price doubled from there and now its dividend yield is 4.62 per cent. Over the past five years, the company has paid dividend exceeding ₹30 per share every year. Currently, the company is trading at PE of 10.7 times against the industry PE of 20.9 times. 

Here is why:

◼ Consistently paying dividend with current dividend yield of 4.62 per cent
◼ Available at an attractive current PE of 10.7 times
◼ Better and consistent cash flow ensuring consistency in dividend. 

ONGC Limited 

ONGC is the largest of its kind crude and natural gas organisation in India, armed with large proven reserves. Through its fully owned subsidiary ONGC Videsh, it has a presence overseas in the form of partnership ventures for oil fields. The recent KG-98|2 field is expected to boost production. Given the humongous demand levels to be met, we do not foresee any reduction in the consumption of crude but an increase in output through development of new wells and ongoing exploration activities. Green energy will only supplement the supply rather than replace it. ONCG intends to spend ₹1 lakh crore by 2030 for expanding its renewable and low carbon sector. It plans to set up renewable portfolio of 10 GW by 2030. Its dividend payout ratio has averaged at 40 per cent for the last four years. The dividend yield for the last four years has been 6 per cent and we estimate this to remain at around 5 per cent. ONGC’s dividend for FY22 and FY23 were ₹10.50 and ₹11.25 per share, respectively. 

Here is why:

◼ Consistently paying dividend with current dividend yield of 3.98 per cent
◼ Available at an attractive current PE of 7.76 times
◼ Dividend yield for the four years has been around 5-6 per cent.
 

CESC Limited 

CESC is India’s first fully integrated electrical utility company with private participation in generation, transmission and distribution of electrical power. The company, through its subsidiaries, also has a portfolio of independent power generation projects and distribution ventures. The Central Electricity Regulatory Commission (CERC) regulates India’s power sector through an availabilitybased earnings model i.e. fixed ROE on power generation assets. Thus, the regulated tariff model provides strong earnings visibility for power generation companies like CESC. Better power demand (peak power demand in India is likely to cross 400 GW by 2030) would drive up PLFs for power generation companies and better PLF incentive income. A recovery in earnings from standalone operations is expected given the strong power demand, lower losses at distribution franchisees (DFs) led by lower transmission and distribution losses, and higher utilisation at Dhariwal Infrastructure along with potential turnaround of the Rajasthan | Malegaon DF. 

Here is why:

◼ The regulated tariff model provides strong earnings visibility for the company
◼ Dividend yield at 3.2 per cent
◼ Recovery in earnings provides visibility in better dividend distribution going ahead. 

Swaraj Engines 

The company, which was earlier owned by Punjab Tractors and Kirloskar Oil Engines, is now owned by Mahindra and Mahindra Limited, which owns a controlling stake of 52.12 per cent stake. The company has announced a dividend of ₹95 per share for the financial year that ended on March 31, 2024. This makes it a dividend yield of 4 per cent at the current price. The company has a manufacturing plant at SAS Nagar Ropar in Punjab and matching shop facilities for manufacturing high-technology engine components for Swaraj Mazda vehicles. The company operates with a low working capital cycle and has a debt-free balance-sheet with good free cash flow generation. With its debt-free status and strong cash pile, the company is able to withstand adverse business cycles like the one witnessed during the corona virus pandemic. Also, the dividend payout of the company has been strong in excess of 80 per cent for the past three years, resulting in a good dividend yield of 4 per cent. This provides better visibility of dividend in the years to come. 

Here is why:
◼ It is a debt-free company with healthy cash flows
◼ Being a subsidiary of Mahindra and Mahindra provides the company with ready business
◼ Has maintained a higher dividend payout that gives better visibility of dividend going ahead. 

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