Investors in the stock market have different risk profiles and financial ambitions. People with high risk profile invest in stocks that offer capital appreciation, while investors with low risk appetite invest in stocks that offer regular and consistent dividends. In the current volatile markets when Sensex is at expensive valuations i.e. ~20x FY19E earnings, investing in higher dividend stocks offer greater margin of safety. Companies with matured business cycles (no major capex in the near term) are the ones which pay high dividends on regular basis.
In the Union Budget 2018-19, Finance Minister Arun Jaitley had proposed 10% tax on dividend distributed by equity oriented mutual funds. As per the proposal, mutual fund schemes will deduct the 10% dividend distribution tax and distribute the rest to investors. This will be implemented from April 1, 2018 onwards, Hence, some companies may go in for buyback in place of dividends to avoid this tax treatment.
Below discussed are some fundamentally strong companies that have high dividend yield
Dividend Yield (%) TTM
3-yr avg. Dividend Yield (%)
Coal India Ltd.
Hindustan Zinc Ltd.
SJVN, a power generation company, operates hydro, wind and solar plants. The total power generation capacity was at 1,964.6MW (FY17). SJVN will develop 1,000 MW of solar power generation capacity over the next 5-7 years. It has average dividend yield of 5.4% over the past three years. Additionally, SJVN has recently announced a buyback offer of 20.68cr shares at a price of Rs38.75 per share. The size of the buyback is ~Rs801cr. The stock is currently trading at a valuation of ~1.1x FY20E P/BV.
Coal India Ltd (CIL)
CIL has leading position in coal mining and produces 84% of the country’s coal output. Its production stood at 543mn tonnes in FY17 vs. target of 599mn tonnes. CIL is planning to expand production to 908mn tonnes by FY20. The average dividend yield of the company was 7.3% for the last 3 years. It had a cash of Rs34,584cr (including current investments) as on September 30, 2017. The stock is currently trading at ~6.8x FY20E EV/EBITDA.
NHPC is a hydropower generation company with power generation capacity of 5,171MW in FY17. In FY17, NHPC had generated 23,275mn units of electricity against targeted 23,000mn units. According to the company’s dividend policy, dividend payout would be 5% of the net worth, which would amount to 60-80% of the annual net profit. The average dividend yield for the past 3 years for NHPC stood at 5%. The standalone cash position of the company was at Rs2,558cr as on September 30, 2017. The stock is currently trading at 0.9x FY20E P/BV.
Hindustan Zinc Ltd (HZL)
HZL, a mining company, produces and refines zinc, lead and silver. It is the second largest producer of zinc globally and also claims of having one of the lowest production costs in the world. HZL aspires to move to underground mining by FY20 with a mining capacity of 17.5mn tonnes per annum. In 2014, HZL had come up with a 6-year expansion plan that required capex of $1.6bn. The cash and cash equivalents of HZL stood at Rs19,176cr (Q3FY18). It has historical dividend yield of 9.3% over the last three years. The stock is currently trading at ~11.2x FY20E EPS.
Castrol India is the leading automotive and industrial lubricant manufacturer in India. It is a debt-free company with cash position of Rs784.2cr as on December 31, 2017. Castrol has maintained average earnings payout ratio of 77% over the last three years. Considering the leadership and strong brand recognition of the company in the lubricants market, we expect Castrol to maintain high dividend yield backed by robust earnings. The average dividend yield for the past three years was 2.1%. The stock is currently trading at a price-to-earnings ratio of ~23x FY20E EPS.