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ITC, Balmer Lawrie, SKF India: Time to bet on high dividend yield plays?

ITC Limited last week announced a dividend of Rs 10.15 per share.
The market recovery since the March 2020 low has mostly been fueled by liquidity and positive news flow in select counters. While Reliance Industries (RIL) gained ground on the stake sale in its telecom venture, Jio Platform, to marquee investors, investors have also rewarded stable corporate performance in the March 2020 quarter amid Covid-19 pandemic. In times such as these, investors also bank upon stocks of companies that pay a higher dividend.

In the current economy where bank fixed deposits offer interest rates to the tune of 4-6 per cent, there are stocks that beat this return via the dividend yields. That said, with the abolishment of dividend distribution tax (DDT), dividends will now be taxed in the hands of the investor/shareholder, irrespective of the dividend’s quantum. The Rs 10 lakh limit has been done away within the Union Budget 2020.

The company distributing the dividend is required to deduct tax at source (TDS) if the amount of the dividend paid to a shareholder exceeds Rs 5,000 per shareholder/investor. The tax withholding rate being 10 per cent (recipient being Indian resident) / 20 per cent (recipient being non-resident). Still, in that context, post-tax dividend yields of some of the stocks are higher than the post-tax interest yield on bank fixed deposits.

So, should investors consider some of the high dividend yield stocks to bring in regular inflows?

Historically, public sector enterprises (PSEs) have been high dividend payers and helped the government bridge any tax collection shortfall. Fourth quarter of the financial year typically provides maximum activity in terms of PSU dividends. The good dividend yield will vary with interest rates and general market conditions, analysts say, but a yield of 4 to 6 per cent is considered quite good.

Among the private sector players, ITC Limited, for instance, that declared its results for the March 2020 quarter last week announced a dividend of Rs 10.15 per share - translating into a trailing dividend yield of 5 per cent. In the past two months, the stock has gained 17 per cent as compared to 12.5 per cent rise in the S&P BSE Sensex and 9 per cent gain in the S&P BSE FMCG index.

ITC will turn ex-dividend on Monday, July 6, 2020. The ex-dividend date for stocks is usually set one business day before the record date. For example, if you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller will get the dividend. Purchase before the ex-dividend date, however, will entitle you to get the dividend.

Investment strategy

Given the Covid-19 pandemic, analysts say past will not serve as a guide for selecting good dividend yield yielding stocks as companies struggle to generate demand for their products. India Inc, they feel, will take a long time to see a full demand recovery to pre-Covid-19 levels.

“The past will not be a good benchmark for finding dividend yield stocks as companies will try to conserve cash and build a war chest to fight the demand slowdown triggered by Covid-19 pandemic. While PSUs did give out good dividends earlier, they are now struggling to keep up the pace with their private sector peers wherever the sector has been opened to private participation. Investors need to be selective and invest where there is the visibility of earnings sustaining even in these troubled times,” suggests A K Prabhakar, head of research at IDBI Capital.

Name Dividend per share Price in Rs Yield
SKF India 130.00 1670.55 7.78
HUDCO 2.35 33.50 7.01
Balmer Lawrie 7.50 112.45 6.67
RCF 2.84 46.85 6.06
HSIL 3.00 51.95 5.77
IRB Infra 5.00 92.50 5.41
OnMobile Global 1.50 28.65 5.24
Timken India 50.00 965.25 5.18
ITC 10.15 202.70 5.01
Cochin Shipyard 15.00 299.65 5.01
GMDC 2.00 40.10 4.99
       
BSE Price in Rs as on July 1, 2020    
Source: CapitalinePlus    



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