Buying Stocks with High Dividend Yield

The rule is simple: Buy Large cap stocks when their dividend yield is about 3-4% and either sell them when the dividend yield falls to 1-2% or better still – HOLD THEM FOREVER.

Dividend yield: The dividend yield is the amount which a company pays out in the form of dividends each year relative to its share price. It’s a great way of measuring the amount of cash which an investor will be able to generate from his/her equity investment

In order to calculate dividend yield, divide the amount of dividends paid during the year by the market price of the share.

Dividend yield = Annual dividend per share / Market Price per share

For example, ITC paid an 850% dividend per share for financial year 2015-16.  The face value of ITC share is Rs. 1 and the share’s market price or trading price is Rs. 223.40.

Dividend per share = Rs 8.50 And, Dividend yield = 3.80 % (Rs. 8.50 divided by Rs.223.40).

In the current falling market, all large cap companies are available at a very cheap price/valuation with high dividend yield. This falling market provides huge opportunity for long term investors to invest in some high quality large cap stocks at reduced prices. At this time, investors should turn their attention to dividend growth and dividend payout ratio instead of daily stock price movement.

List of Stocks with High Dividend Yield –

Disclaimer: many of these stocks (while pay high dividend) are an ‘Avoid’ on our list on account of their inability to maintain these yields going forward.

The great advantage of investing for dividends, particularly at times when the markets are down is that:

[1] You earn a good tax free rate of return on your investment, and

[2] You dramatically increase your chances of making handsome capital gains in future.

However, while picking up stocks, one has to check that lower stock prices can be because of various others reasons like falling profitability, government regulatory policy etc. Keep in mind that the company pays dividends out of its profits (i.e. current year profits or accumulated reserves). When profitability declines, sooner or later it will have an impact on the share price and dividend payouts of the company.

Best investment approach for investors looking to invest in stocks with  high dividend yield should be simple – Whenever one of these companies become available below a certain target price, buy few shares in it with a view to hold on to them forever.

What an investor needs to observe is that the price of certain high dividend paying stocks, from time to time drops down to levels where a share purchase starts resembling a fixed deposit i.e. a dividend yield of 4-5%. At that point, they should invest in that company.

Factors to Evaluate Stocks with High Dividend Yield

 [1] Historic Dividend Yields – Do check the dividend yield history of the stock for the past 3, 5 and 10 years. If it has been a good dividend paying stock in past, chances are high that it will remain so.

[2] Dividend Payout History – highlights the proportion of the company’s profit which the company pays out as dividend. It is an extremely efficient tool to measure a company’s ability to maintain or grow its dividend yield. Read More: Dividend Payout Ratio – Best Of The High Dividend Paying Stocks

[3] Sustainability of Dividends – A company can only give dividends if it is making profits. So dividends will be sustainable if the business keeps running profitably. This is the reason you should check quality as well as the financial strength of the business. If business itself is not doing well, the company might not remain capable of paying dividends consistently in future. Sounds logical

[4] Possibility of Future Dividend Increases – You don’t want to buy a stock that will just pay you dividend today. You want to buy stocks that will sustain them, or better still, increase their dividends in future. So you need to pick stocks that are expected to grow reasonably and generate higher profits in future.

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Rajat Sharma

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