Rush For Dividends—What Does It Mean For Investors In Stock Markets

Dividends have a signalling effect, higher dividends indicate that the management is positive on future earnings and shareholder keenly looks forward to the dividends announcement as this is the tax free income in the hands of shareholders.

Dividend policies of companies in India can be put under three categories. First category is “constant dividend policy” which means they pay the same amount year on year. Second category is “dividend as a function of earnings”, which means that there is a certain relationship followed between how much is earned and distributed as dividends. Third category is of companies where dividend is a residual of companies fund requirement but management ensures to maintain the dividend paid last year and also tries to increase it to an extant which is manageable in the future.

Dividend policy is also influenced by the tax regime, in India we had a regime where dividend was taxable in the hands of shareholder, then this was replaced by dividend distribution tax (DDT) where companies deduct tax before distribution dividends and it is free in the hands of shareholder. Budget proposal for the coming financial year introduces a levy of 10% tax on dividend income in excess of Rs.10Lakh in the hands of receiver, this is a tax for super rich and it would not affect retail investors who would still continue to receive dividends as tax free.

With this proposed change in budget for the financial year 2016-17 what can be anticipated is a rush for Interim dividend pay-out for companies which are largely controlled by promoters. Companies in the Tata Group, Reliance industries, Infosys, Wipro, Airtel etc. where promoters (as individuals) are holding majority shares are likely to announce Interim dividends before the financial year ending 31 March and save the 10% outgo as taxes on dividend.
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Dividend yield is defined as dividend as a percentage of share price. If we look at the CNX 500 companies and identify the top 10 dividend yielding companies the list suggest Indiabulls Securities as a company with the highest dividend yield in 2015 and 2013 it has the second highest dividend yield in 2014. There are also some recurring names like Coal India, NMDC.

We extend the study to see if there is a relationship between Promoter holding and dividend yields.

Our findings suggest that there is a strong relationship and dividend yields are highest for companies where holding is concentrated to as high as 80%.

Table -2 summarises the average dividend yields and promoters stake relationship. In the year 2015 average dividend yield is highest at 1.76 when the promoter stake is above 80%, this is closely followed by dividend yield of 1.23 when promoter stake is over 60%. We see a similar relationship in the year 2014 where dividend yields touch as high as 3.61. names of companies where promoter holding is above 80% includes Neyveli Lignite, Hindustan Copper, MMTC, Mngl. Ref.& Petrochem., NHPC, Indian Bank, Central Bank Of India, Indian Overseas Bank, National Aluminium, IDBI Bank. Since the banking Industry is going through a tough time retail investor should not expect dividends from them for couple of years but they can surely expect the dividend yields to be high for companies where promoter holdings are high. We also expect to see few companies where promoter holding is concentrated to declare Interim dividends before March 2016 to save tax on dividends if it exceeds Rs. 10 Lakh in the hands of retail Investors.