Updated on – December 2020
In this article, we will cover,
– What are dividend-paying stocks?
– List of best dividend stocks to buy now in India
– Things to consider for selecting the best dividend stocks to buy
– Detailed profile, pros and cons of stocks in the model portfolio
– Video on how to analyse and pick Dividend stocks for investments
If you’re searching for the stock market on the internet then probably you’re ahead of 96% Indians the reason being that only 4% of Indians invest in the stock market. And if you’re are searching for what is the dividend, dividend yield or highest dividend-paying stocks or best dividend stocks to buy in Indian Market then you’re again in a better position compared other types of investors and traders in the market.
What are dividend-paying stocks?
Dividend-paying stocks are companies that pay out regular dividends. The best dividend stocks to buy and hold are usually well-established companies with a track record of distributing earnings back to shareholders. A dividend can be described as a reward that publicly-listed companies extend to their shareholders, and its source is the company’s net profit. Such rewards can either be in the form of cash, cash equivalent, shares, etc. and are mostly paid from the remaining share of profit once essential expenses are met. However, companies may decide to retain their accumulated profits to reinvest in the business or reserve it for future use.
Dividend investing is a strategy that gives investors two sources of potential profit: one, the predictable income from regular dividend payments, and two, capital appreciation over time. Buying dividend stocks can be a great approach for investors looking to generate income or those simply looking to build wealth by reinvesting dividend payments.
This strategy can also be appealing for investors looking for lower risk. Some of the best dividend stocks to buy can be the safest to own. But there can still be pitfalls, and dividend stocks can be risky if you don’t know what to avoid. Not every dividend stock can maintain a payout in every economic environment — something the COVID-19 pandemic has demonstrated — but a diversified portfolio of dividend stocks can get you a steady income.
List of best dividend stocks to buy now in India
|Sr. No||Company Name||BSE Scrip Code||NSE Symbol||CMP (as of 4th Dec)||Rating||Industry|
|1||Bajaj Auto||532977||BAJAJ-AUTO||3311.4||4.5||2/3 Wheelers|
|6||Hero Motocorp||500182||HEROMOTOCO||3180.45||4||2/3 Wheelers|
|7||REC||532955||RECLTD||127.25||4||Finance (including NBFCs)|
|8||Oil India||533106||OIL||107.1||0.5||Exploration & Production|
|9||Mphasis||526299||MPHASIS||1334.9||3||IT Consulting & Software|
|10||VST Industries||509966||VSTIND||3751.7||5||Cigarettes,Tobacco Products|
|11||Petronet LNG||532522||PETRONET||262.05||3||Oil Marketing & Distribution|
|12||JK Paper||532162||JKPAPER||99.65||0.5||Paper & Paper Products|
|13||TCS||532540||TCS||2727.55||5||IT Consulting & Software|
|14||Torrent Power||532779||TORNTPOWER||323||0.5||Electric Utilities|
|15||Gujarat Pipavav Port||533248||GPPL||92.05||0.5||Marine Port & Services|
|16||VRL logistics||539118||VRLLOG||186.8||0.5||Transportation – Logistics|
|18||Finolex Industries||500940||FINPIPE||651.9||1||Plastic Products|
|19||Infosys||500209||INFY||1134.65||4.5||IT Consulting & Software|
|20||Sun Tv||532733||SUNTV||443.8||4||Broadcasting & Cable TV|
Things to consider for selecting the best dividend stocks to buy:
1) The company should at least have a dividend payout ratio of 40%. The dividend payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. Some companies pay out all their earnings to shareholders, while some only pay out a portion of their earnings. If a company pays out some of its earnings as dividends, the remaining portion is retained by the business. Several considerations go into interpreting the dividend payout ratio, most importantly the company’s level of maturity. A new, growth-oriented company that aims to expand, develop new products, and move into new markets would be expected to reinvest most or all of its earnings and could be forgiven for having a low or even zero payout ratio.
2) Overall dividend yield should be above 3%. The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price. It’s important for investors to keep in mind that higher dividend yields do not always indicate attractive investment opportunities because the dividend yield of a stock may be elevated as the result of a declining stock price.
3) The company should have a fair track record when it comes to offering dividends and paying off debts. A firm’s dividend policy has the effect of dividing its net earnings into two parts: retained earnings and dividends. The retained earnings provide funds to finance the firm’s long-term growth. Dividend policy of the firm, thus, affects both the long-term financing and the wealth of shareholders. As a result, the firm’s decision to pay dividends may be shaped as a long-term financing decision and as a wealth maximisation decision. Stability or regularity of dividends is considered as a desirable policy by the management of most companies. Shareholders also generally favour this policy and value stable dividends higher than the fluctuating ones.
Keeping these pointers in mind, along with other financial parameters, will help gauge a company’s profitability and financial standing effectively.
Detailed profile, pros and cons of stocks in the model portfolio
Bajaj Auto is a two-wheeler manufacturer that has proven itself over the years. What differentiates Bajaj Auto from other two-wheeler makers in India is its relentless focus on markets outside of India. The company has managed to de-risk its business by not being over reliant on any one geography or product.
The company is by far India’s largest motorcycle and three-wheeler exporter. The company’s revenue share from exports has increased from 28.2% in FY10 to 42% in FY20. It also continues to dominate the three-wheeler segment and remains the market leader. On the other hand, Bajaj has a poor presence in the scooter market. Bajaj Auto was the leader in the scooter market till the motorcycle momentum picked up in the 1990s. Bajaj shut down its scooter business post that, but the scooter business is booming.
The Company’s growth and presence in the domestic and international markets have been on the back of its own brands as well its alliance with KTM. Bajaj has recently entered Electric two-wheeler space with its launch of the iconic Chetak which could be a growth trigger over the long term. The company’s revenues have grown at CAGR of 10% over FY10-FY20 whereas profit after tax has grown at a CAGR of 12% over the same period. The company has superior return ratios with ROCE of 29.61% and ROE of 23.18%. Apart from all this, the company is a high dividend paying stock with a payout ratio of 67% in FY20 and provides a dividend yield of 4%. Most importantly the company has paid out above 40% of its net profits as dividend consistently.
GAIL enjoys a dominant position in the natural gas transmission business with a market share of 70%, catered to by its large pipeline network covering 12200 km. The setting up of pipelines requires large investments and navigating a complex regulatory framework. GoI’s focus on increasing the share of natural gas in the overall energy mix of the country to 15.0% from 6.5% currently has resulted in the government taking several steps to increase natural gas consumption. Going forward, the demand for natural gas is expected to remain healthy driven by the City Gas Distribution (CGD) and the fertiliser sector.
GAIL has also diversified into downstream sectors i.e. manufacturing of petrochemicals and liquified petroleum gas (LPG). The LPG segment has been aiding profitability of GAIL and maintaining healthy segmental contribution. GAIL’s financial risk profile is characterised by healthy profitability and strong cash accruals resulting in comfortable debt metrics and capital structure. The company’s revenue and profits have grown at 11.95% and 8.92% CAGR respectively over the last 10 years. The debt levels continue to remain low with Debt/Equity at 0.13x.
On the dividends front, the company has constantly maintained a dividend payout ratio over 25% which is not very high, but its excellent superior dividend yield currently at 5.12% justfies including GAIL in the model portfolio, making it a great dividend stock. On the other hand Petrochemical, LPG and LHC segments are exposed to the commodity price risk as sustained low crude oil prices result in low realisations for petroleum products. Also the company is dependent on government regulations for its tariffs.
Hindustan Zinc has a mined metal capacity of around 1.2 MTPA, and smelter capacities of 8,90,000 TPA for zinc, 205,000 TPA for lead, and 800 TPA for silver. It is the second-largest zinc-lead miner and fourth-largest zinc-lead smelter globally. With a market share of over 75% by volume, it enjoys a dominant position in the domestic zinc market.
Furthermore, high entry barriers, such as capital intensive operations and lack of zinc ore mines, lend a significant competitive edge to the business risk profile. Presence in global markets also enhances revenue diversity; in fiscal 2020, export accounted for around 20% of revenue. High operating efficiency is driven by significant backward integration and low-cost, high-grade zinc reserves. Operations are integrated across the entire value chain. As on March 31, 2020, net reserve and resources were 403 MT, ensuring a long mine life of over 25 years. With access to bulk of lead-zinc deposits in Rajasthan through long-term agreements with the Government of India (GoI), the company should be able to sustain as a low-cost producer of zinc over the medium term. The Covid-19-led lockdown had a limited impact on its operations as it produces an essential commodity. Post the temporary impact of the lockdown in April 2020, the company witnessed significant ramp up in production and is currently operating at almost full capacity utilisation.
Also, increase in export has offset decline in domestic demand during the lockdown, supported by low-cost operations. The financial risk profile is supported by a large networth, strong liquid surplus, and absence of long-term debt. Cash and equivalent stood at Rs 22,247 crore as on March 31, 2020. However, dividend payouts are generally high in order to support debt at Vedanta Resources. The company has a dividend payout ratio of 102% in FY20 leading to a dividend yield of 9%. However Hindustan zinc is exposed to cyclicality in the galvanised steel sector. Demand for zinc is closely linked to the galvanised steel industry, which consumes around 70% of the zinc produced in India. Zinc also faces competition from substitutes like aluminium and other alloys for galvanised steel. The company also faces high concentration risk in its business profile, as over 75% of revenue and profitability comes from the zinc-lead business.
SJVN is a mini ratna company promoted by the GoI (59.92%) and the GoHP (26.85%); the balance stake in the entity is held by the public. It currently has an installed capacity of 2,014.5 MW, and is currently developing projects of capacity 2,556 MW. Apart from these, there are other hydro projects in SJVN’s portfolio which are under survey and investigation, DPR preparation, feasibility study stages. Its flagship project, 1,500-MW Nathpa Jhakri hydro power project (HPP) has completed 15 years of operations.
The GoI and GoHP have demonstrated their support for SJVN through equity contributions in the past. In addition, SJVN was able to secure project debt funding from World Bank at a cost competitive rate on account of it being a GoI entity. – SJVN has a cost-plus tariff structure for both operational and under construction projects which ensures recovery of fixed charges for debt servicing as well as earning regulated returns. For the year ending 2020, SJVN has a dividend payout ratio of 52%. Currently the company provides a dividend yield of 8.38%.
The company has a good dividend track report and has consistently declared dividends for the last 5 years. With a strong net cash balance, SJVN investors may not have much to worry about in the near term from a dividend perspective. Sizeable under-construction capacity (2,556 MW) exposes SJVN to significant project execution risks (completion within budgeted time and cost estimates). These risks, however, are mitigated by the experience of SJVN in developing similar projects. SJVN is exposed to the risk of delayed payments from utilities with weak financials (more than a third of the allocated capacity). This is mitigated through its competitive cost of generated power, which has resulted in relatively lower debtor days for SJVN compared to other Central Public Sector Undertakings operating in this space
ITC Ltd., which was earlier known as Imperial Tobacco Company, started as a cigarettes manufacturing company with brands like Goldflake, Flake, Classic under its banner. It has expanded into education and stationery products, hospitality, paperboards and packaging, among others. Acquisition of Sunrise Foods Pvt Ltd is expected to strengthen its market position in the spices segment and further improve diversity. A strong brand, a wide product portfolio, an established distribution network, and robust research and development capability have enabled the company to consolidate its position as the leader in the Indian cigarettes market.
The strong brand loyalty of cigarette smokers is reflected in the sustained market share and profitability over the years, notwithstanding the increase in duties. Healthy internal cash accrual, low debt, and robust liquidity have strengthened the financial risk profile. For fiscal 2020, the consolidated operating margin was 39% (38.3% in fiscal 2019). Debt was minimal at around Rs 7 crore, against a large tangible networth of over Rs 64,900 crore as on March 31, 2020. Liquidity was exceptionally strong because of cash and liquid investments (bonds, debentures, mutual funds, and bank deposits) of over Rs 35,600 crore as on March 31, 2020. Consequently, a significant part of the expansion plans and acquisition of SFPL is expected to be funded through internal cash accrual of over Rs.5000 crore per fiscal (net of dividend payout) and available liquidity.
Over the past 10 years the company has maintained a dividend payout of over 50%, currently yielding to 5.20%. Its dividend track record has been high and consistent making it a very good dividend bet. One the negative front, the company faces regulatory risks in the cigarette business including increase in taxes, and there are competitive pressures in the FMCG segment. These risks are partially offset by the focus on building cost efficiency, and strong backward integration in various businesses.
If you’re a dividend investor, you can’t just pick the stocks with the highest dividends. That may seem counterintuitive, but there is often a reason why companies pay out high dividends. There could be problems with the underlying business, or the dividend payout ratio is much too high and threatens future growth. The firm may have a debt-to-equity ratio that makes investors believe the company can’t survive in the long run.
Watch our video on how to analyse and pick Dividend stocks for investments
In order to get an exposure to Best Dividend Stocks, you would need a total of Rs. 17,639 for the below curated portfolio as of 4th Dec, 2020.
|Compnay Name||CMP (As of 4th Dec 2020)||Quantity||Qty*CMP||Weightage|
The below table covers some of the most important factors while evaluating dividend stocks such as return ratios including RoE and RoCE, operating margins, sales and earnings growth and market cap among others.
|Sr. No||Company Name||BSE Scrip Code||NSE Symbol||Rating||Industry||CMP (As of 4th Dec 2020)||Market Capitalization (Rs Crore)||Net Worth (Rs Crore)||Price/ Earnings Ratio||Dividend Payout Ratio (%)||Dividend Yield (%)||Debt/Equity Ratio||Return On Equity (%)||Return on Capital Employed (%)||Operating Margin (%)||Topline CAGR-3 years (%)||Bottomline CAGR- 3 years (%)||Working Capital Cycle (Days)||Inventory Turnover Ratio|
|1||Bajaj Auto||532977||BAJAJ-AUTO||4.5||2/3 Wheelers||3311.4||96867.06||23719.74||22.71||66.63||3.58||0.01||23.18||29.61||16.85||11.21||8.42||450.94||20.86|
|6||Hero Motocorp||500182||HEROMOTOCO||4||2/3 Wheelers||3180.45||62633.14||14913.37||24.65||49.41||2.87||0.04||22.13||27.23||12.21||0.74||-4.09||227.74||15.77|
|7||REC||532955||RECLTD||4||Finance (including NBFCs)||127.25||27204.5||40592.55||4.4||43.69||7.99||7.53||14.22||8.67||87.3||7.15||-7.64||26.69|
|8||Oil India||533106||OIL||0.5||Exploration & Production||107.1||11836.28||27672.68||4.13||30.13||9.71||0.47||13.2||9.68||15.91||8.34||16.73||1014.23||0.23|
|9||Mphasis||526299||MPHASIS||3||IT Consulting & Software||1334.9||25632.97||5829.69||20.99||55.1||2.55||0.1||21.37||26.16||18.63||13.33||13.93||79.64|
|10||VST Industries||509966||VSTIND||5||Cigarettes,Tobacco Products||3751.7||5871.52||793.35||18.56||52.3||2.71||0||41.89||57.89||35.17||10.35||26.11||401.34||2.1|
|11||Petronet LNG||532522||PETRONET||3||Oil Marketing & Distribution||262.05||38655||11490.19||15.64||69.36||4.85||0.28||25.81||28.14||14.19||12.93||16.94||25.62||58.51|
|12||JK Paper||532162||JKPAPER||0.5||Paper & Paper Products||99.65||1876.13||2317.18||7.2||15||3.61||0.93||20.18||20.77||21.97||5.2||42.18||77.56||3.93|
|13||TCS||532540||TCS||5||IT Consulting & Software||2727.55||1073557.26||95137||33.91||84.65||1.15||0.08||37.34||47.76||27.41||9.99||7.14||233.86||2.4|
|14||Torrent Power||532779||TORNTPOWER||0.5||Electric Utilities||323||15855.55||9723.02||9.61||47.48||3.52||0.78||16.78||13.12||27.45||11.05||57.03||34.06||13.64|
|15||Gujarat Pipavav Port||533248||GPPL||0.5||Marine Port & Services||92.05||4510||2014||16.89||92.59||6||0.03||14.24||17.58||59.4||2.49||5.17||-25.92||3.31|
|16||VRL logistics||539118||VRLLOG||0.5||Transportation – Logistics||186.8||1802.35||584.01||70.18||3.51||0.61||14.75||15.73||11.45||5.52||9.49||-21.82||19.74|
|18||Finolex Industries||500940||FINPIPE||1||Plastic Products||651.9||7871.04||2282.8||24.3||38.28||1.58||0.11||14.27||16.43||18.2||4.69||-2.76||197.6||2.73|
|19||Infosys||500209||INFY||4.5||IT Consulting & Software||1134.65||506805.76||71000||28.26||44.76||1.47||0.07||25.31||32.58||26.09||9.85||5.18||113.23|
|20||Sun Tv||532733||SUNTV||4||Broadcasting & Cable TV||443.8||19069.75||6316.65||15.6||71.13||5.17||0||22.61||29.88||66.57||9.98||7.94||850.01||164.75|
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