Last month, the government had cut the marginal tax rate from 35 per cent to 25 per cent in a bid to boost the sagging economy. Following the move, the Nifty had risen as much as eight per cent as analysts raised earnings growth forecasts for most companies.
ICICI Securities believes investors can look at a strategy of investing in high-dividend yield stocks. The brokerage says the strategy will work if bond yields also soften along with the tax rates.
ONGC, BPCL, Coal India, Hero Motocorp, NMDC, Power Grid and Infosys are the top picks for the brokerage in the high-dividend space.
The brokerage says companies which generate stable cash flows should step up their dividend payouts.
“Sectors where growth is slow and stable but cash flow generation is high should ideally step up the payout to at least three-fourths of their profit because new investments will be risky in a slowing demand environment,” wrote ICICI Securities analysts Vinod Karki and Siddharth Gupta in a note.
They say companies may no longer opt for buybacks over dividends as the government has plugged the tax arbitrage by introducing the 20 per cent buyback distribution tax in this year’s budget.
Investors typically give more importance to returns than dividends while investing. However, dividend payouts by companies have made a meaningful contribution to returns.
“Nifty price return CAGR has been 12.2 per cent over the past 20 years, while the total return (based on dividend reinvestment) has been 13.8 per cent. This extra return from reinvested dividends is three times the original invested amount. For instance, Rs one million invested in March 1999 in Nifty50 index has become Rs 3.5 million solely on the back of re-investment of dividends, while capital appreciation gain has yielded Rs10.7 million,” says the brokerage.
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