How NMDC Shares Can Help You Earn Higher Returns Than SBI Bank Deposits?

Investment

oi-Sunil

By Sunil Fernandes

Updated: Tuesday, October 6, 2015, 9:52 [IST]

It was perhaps one of the most volatile weeks we have witnessed in recent times for the share market in India. Among the worst hit were metal and mining stocks on fears that Chinese growth rate is falling off the cliff. Metal stocks are badly battered and their dividend yields have become more attractive than bank deposit interest rates.

Let's take a look at one such stock NMDC, which can give you superior returns than SBI bank deposits.

Dividend yield on NMDC

Last year NMDC, a company that is into iron ore mining declared a dividend of 850 per cent. That is a dividend of Rs 8.50 per share.

Now, the market price of NMDC is around Rs 95. So, if you buy 100 shares at Rs 94.80 you pay Rs 9500. You get a dividend of Rs 850 on that, which translates into a dividend yield of near 9% per cent per annum.

Banks offer an interest rate of 8 per cent. In fact, the maximum interest rate offered by State Bank of India is just 8 per cent.

So, NMDC dividend yields could beat the interest rate of SBI. Now, the real catch is not that. You will be taxed on the interest rate earned from the SBI deposit, but, dividend from NMDC is tax free.

Now, we have to work on the assumption that NMDC will declare the same dividend as last year. It is unlikely that NMDC will reduce the dividends. In fact, going ahead it might only increase the same as it is a cash rich company with zero debts on its books.

The only catch is that the share price must not fall from the current price of Rs 99. If it does sharply than probably your overall yields would not be high, as you have to take into account capital losses.

On the other hand if NMDC shares rally, you are gaining from dividend yield and capital appreciation.

How to calculate dividend yield of shares?

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