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| Watch out for high dividend-yield stocks |
| B G Shirsat / Mumbai Apr 08, 2009, 00:34 IST |
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As many as 110 out of 1,300 dividend-paying companies may give dividend for 2008-09. According to a Business Standard Research Bureau analysis, these 110 companies, which had paid dividend in 2007-08 by distributing 22.85 per cent of their net profit, are currently trading at a dividend yield of over 5 per cent each.
In a market downturn, buying stocks of companies with a high dividend yield is considered a good defensive strategy. Generally, this strategy pays up well when the market recovers from the bottom.
These 110 shortlisted firms have earned a net profit of Rs 10,392 crore during the nine months ended December 2008 compared to their full-year net profit of Rs 11,283 crore recorded in 2007-08.
This means, the full-year net profit of these firms in 2008-09 may well exceed the previous year’s. In that case, there is no reason why these companies should not declare dividend even for the just concluded financial year. The prices of most of the firms are currently down by over 50 per cent and, hence, they are trading at attractive dividend yields.
Of the 110 companies, 14 are currently trading at a dividend yield of over 10 per cent each. These 14 firms include Jetking Infotrain, M. M. Forgings, Gujarat NRE Coke, Graphite India, Shiva Texyarn, Cybertech System, Flex Foods, NCL Industries, Shipping Corporation of India, GRM Overseas and Jolly Board. What makes the stocks of these companies attractive is the fact that their current market value is 50-65 per cent below their respective 52-week highs.
According to analysts at HDFC Securities, dividend yield, which is the dividend per share as a percentage of the market price, is a measure that allows one to buy stocks that are only temporarily out of favour or under-priced.
At a time when sharp corrections take place with the bat of an eyelid, one may pick up a stock that has a high dividend yield and gain once the market recovers. But then, catching a stock at its bottom following a correction is not easy. So, there is always the possibility of the stock falling further, causing temporary capital erosion.
Though dividends are tax-free in case the investor doesn’t sell the shares within three months at a loss, s/he has to bear other transaction-related costs such as securities transaction tax (STT) and short-term capital gains tax.
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