Investing in high dividend-paying stocks is a good way to earn a steady passive income. And contrary to popular perception, high dividend-paying stocks also appreciate at a steady rate providing capital returns to their investors well. So a financially strong dividend-paying stock with a good business provides the best of both worlds - a year-on-year appreciation in your initial capital, and annual income in the form of equity dividend.
Why dividend stocks?
Dividend income is a great way to cushion finances from the blow of inflation that eats into the purchasing power of our salaries and regular income. Corporate revenues and profits are generally protected from inflation and in fact, higher prices allow companies to boost earnings.
Higher earnings, in turn, allow companies to pay bigger dividends to their shareholders when inflation is running high. We have seen this in many sectors in the last one and a half years.
In other words, expect dividend income to outpace your regular income when inflation is running high.
This is the right time to start accumulating high dividend-paying companies. There has been a sharp correction in stock prices in the last few weeks. This greatly boosted the dividend yield for most dividend-paying companies. Secondly, we are getting closer to corporate India’s annual dividend-paying season. The majority of the companies pay dividends at the end of their fourth quarter and annual results at March-end every year.
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So the current weakness in the broader equity market is a perfect window to pick stocks that are expected to pay hefty equity dividends on their earnings for FY 2022-23. But, you should not invest in any random stock with a high dividend yield.
You should only invest in stocks that are either expected to maintain their dividend pay-out or they should increase their dividend pay-out for FY23 due to higher earnings.
A high Dividend Yield is not enough
We have listed ten stocks that have high dividend yield and are expected to pay higher dividends for FY23, thanks to a faster earnings growth in the first nine months of FY23. These ten stocks in our list currently have a dividend yield ranging from a low of 3.5 percent in the case of Rashtriya Chemicals & Fertilisers (RCF) to a high of 8.5 percent for automotive component maker Banco Products. For comparison, the 30 stocks that are part of BSE Sensex currently offer a dividend yield of 1.2 percent on average.
We have picked up stocks from the BSE500 index that offer the best combination of a higher-than-market dividend yield and faster revenues, EBITDA and net profit growth in the first nine months of FY23 (April-December 2022 period).
1. Government-owned RCF is at the top of our list with a dividend yield of 3.5 percent currently. The company's net sales and net profit nearly doubled during the April-December period on a year-on-year basis and shareholders can expect a big dividend payout by the company at the end of Q4FY23 earnings.
The stock is trading at a low valuation with a P/E of 5.8x and price to book value ratio of 1.3X.
For comparison, BSE Sensex is currently trading at a P/E and P/B ratio of 22.6X and 3.3X respectively.
2. Public sector oil & gas producer Oil India is next on our list with a dividend yield of 5.6 percent currently and net profit growth of 99.4 percent in the first nine months of FY23. The stock is also very cheap with a P/E multiple of 4.1X and price to book value of 0.9X.
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3. Coal India, another public sector behemoth, comes next with a dividend yield of 7.9 percent currently, which is actually higher than the interest on long-term bank fixed deposits. Shareholders can expect an increase in payout by the company in FY23 as its net profit is 112 percent during the first nine months of FY23. Its valuation is also very reasonable with a P/E and P/B ratio of 4.5X and 2.5X respectively.
4. Software exporter Accelya Solution has a dividend yield of 5.3 percent currently and reported earnings growth of 114 percent in the first nine months of FY23. The stock is currently trading at a P/E and P/B of 17.5X and 7.3X.
5. Garment maker and retailer Kewal Kiran Clothing is next with a dividend yield of 4.5 percent currently and net profit growth of 54 percent in the first nine months of FY23. The stock valuation is however on the higher side with a P/E multiple of around 23X and a P/B ratio of 5X.
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6. Private sector port operator Gujarat Pipavav Port is next on our list with a dividend yield of 4.1 percent and a net profit growth of 85 percent in the first nine months of FY23. This means a higher dividend payout by the company in FY23. The stock is reasonably priced at the current level with a P/E of 16X and price to book value ratio of 2.3X.
7. Automotive component maker Banco Products has a dividend yield of 8.5 percent currently and net profit growth of 64 percent in the first nine months of FY23, which means a higher dividend payout in FY23. The stock is trading at a P/E of 7.5X and price to book value ratio of 2.3X.
8. Zinc and silver maker Hindustan Zinc is next on our list with a dividend yield of 5.6 percent and 17 percent growth in its net profit in the first nine months of FY23. The stock is currently trading at a P/E and P/B of 12.5X and 4.5X respectively.
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9. Another public sector company Balmer Lawrie has a dividend yield of 5.6 percent and reported 40 percent year-on-year growth in its net profit in the first nine months of FY23. The stock is reasonably priced with a P/E and P/B ratio of 12.5X and 1.5X respectively.
10. Engine maker Swaraj Engines is the tenth company on our list with a dividend yield of 5.1 percent currently. The company's net sales are up 19 percent in the first nine months of FY23 while its net profit is up 12.5 percent in the period, which means higher dividend pay-out for FY23. The stock is trading at a P/E of 15.5X and price to book value of around 6.5X currently, much lower than the Sensex valuation currently.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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