If you like to own high dividend paying stocks in India then I am sure that by now you are aware of many companies which pay extremely handsome dividends. While some of them manage to consistently pay such dividends, others are not so consistent.

Again, even amongst these subsets, the share price of some companies keeps appreciating consistently while some others manage to maintain their dividend yields despite the fact that their share prices are continuously declining. Mostly this happens because companies like to maintain their previous year’s dividend yield if not better it. They often dip into their accumulated reserves to match their previous year’s dividends in years when their profits do not justify such high payouts. It is about sending a message to the shareholder that – “things are going well, there is no problem with the underlying business and to the extent the profits are declining, we expect them to get back to normal in time”.

How then do you select high dividend paying stocks, the ones which will continue to pay such dividends or better still increase them. For example, public sector banks have taken a beating over the last 2 years with the prices of most of them declining by over 50% and yet they keep paying high dividends[i]. Many investors are now looking at these government owned banking companies with fascination. The question is – are people opening any new accounts in these banks? Will their businesses prosper in future vis-à-vis their private sector peers? Or are you buying them hoping that they will keep dipping into their reserves endlessly to maintain their yields? Sure enough, an 8% tax free dividend for a government owned company is a screaming buy, but really, what about the longevity of such businesses in a competitive environment? Will the government be able to turn things around? The debate is open. Surely, if they come out their NPA mess, you will end up owning this 8% yield forever and will absolutely love the share price appreciation.

To get back to the main point, how can you zero in on ‘high quality’ dividend paying stocks in India? As a thumb rule always pay attention to the Dividend Payout Ratio (DPR) more than the dividend yield. DPR tells you the proportion of the company’s profit which the company pays out as dividend and is calculated by dividing Dividend Per Share (DPS) by the Earning Per Share (EPS). If the company’s EPS keeps declining, and the company keeps matching its DPS, then the DPR will start looking inflated. Of course this happens over a period of time.

Take the example of HCL Infosystems below:

HCL maintained an average dividend yield of 5.93 % between FY 2003 – FY 2012. The table below shows the dividend yield of HCL for each of these years.

(click to enlarge)

If you notice, for most of these years and in particular from FY 2005 onwards, HCL had an extremely high DPR averaging over 65%. In 2013, when the economy slowed down HCL rightly did not declare any dividend distributions. If you paid close attention to the DPR, you could have easily figured this out in the earlier years.

(click to enlarge)

Ideally, companies which have a DPR of over 55% could prove to be risky because in times of economic slowdown or temporary setback to the business, when profitability declines, they usually do not have the cushion of dipping into their reserves to maintain high dividends.

The best companies are the ones which have a high dividend yield and at the same time have managed to maintain a low DPR. With such companies you can be assured that either their future profitability or their built-up reserves will support a consistent dividend payment even if there are temporary setbacks or slowdowns along the way. Needless to say, you must always focus on buying businesses where you see potential for future growth. On the other hand, if you are convinced that the fall in share price is temporary, it may be a great time for value investing.

Below, I have made a list of the top 10 dividend paying stocks out of the BSE 200 companies, along with historic price performance charts (selected on the basis of 5 year dividend yields). Think about how many questions these charts raise? Did you think such a result would show up? Any of these stock ideas interest you? An even more interesting observation is about Allahabad Bank, the current dividend yield of which is well in excess of 6% (as of 25th April 2014). Is it just a value investing opportunity or a value trap?

List of high dividend paying stocks in India

5 Year Dividend Yield 3 Year Dividend Yield
Castrol India Limited 5.04 5.86
Indiabulls Real Estate Limited 5.55 9.09
Engineers India Limited 5.31 3.11
Ashok Leyland Limited 5.2 5.16
Oil India Limited 5.06 5.28
ONGC 4.55 4.31
Hexaware Technologies Limited 4.47 5.18
Andhra Bank 4.14 4.95
Indian Overseas Bank 4.07 4.13
Allahabad Bank 3.86 4.14

Previous Year’s Price Action

The bottom line is – don’t get excited just by historic dividend payouts. There is a lot more to life!

[i] In fact, paying high dividends in such times could also act as a price supporting mechanism by getting investors interested in buying the shares at low prices.

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