The one good thing about buying shares with good dividend yield is that you get dividends that are tax free in India. With interest rates on bank deposits and corporate deposits falling, dividends can offer you better returns than interest on bank deposits. In fact, bank deposits are also taxable in India.
We have recommended two shares with high dividend yields. Now, there are scores of companies that offer better dividend yield than the two we have mentioned. But, the problem is that we have used companies that we believe are undervalued and could also give you higher returns by way of capital appreciation.
Noida Toll Bridge
Noida Toll Bridge runs the DND Flyway, which connects Delhi to Noida. The company has been a good, profitable, dividend paying company.
The business is virtually risk free given the fact that toll collections over a period of time through the bridge is likely to keep climbing given the rapid development in Noida.
The shares of the company over the last couple of months have fallen, while the dividend yield has gone up. Noida Toll Bridge last year declared a dividend of Rs 3 per share or 30%.
The current market price share price of Noida Toll Bridge is Rs 25. Let's assume now that you bought 400 shares of Noida Toll at Rs 25. The amount you would spend is Rs 10,000. By July-Aug, you could receive a dividend of Rs 1200 (Rs 3 per share).
This means you have received a dividend yield of 12% tax free on Noida Toll Bridge shares. If you would place Rs 10,000 in a bank deposit, you would get just Rs 750, that too after 1 year.
Of course, there is an element of risk in the company declaring a lower dividend or the share price going down. We do not see either happening. The company's revenue and profitability stream would continue due to the risk free nature of business.
Also read how to calculate dividend yields
NMDC is a government majority owned company, which mines iron ore. It is a high margin business with the only threat being a sharp fall in iron ore prices. The company is a cash rich company with zero debts.
The share price of NMDC has fallen sharply from levels of Rs 192 to Rs 100. This has pushed the dividend yields to as much as 8.5%.
Last year the company declared a dividend of 850% or Rs 8.5 per share. This translates into a dividend yield of 8.5% on the current market price of Rs 100.
The shares of NMDC have fallen sharply and a fall in iron ore prices are already reflected in the share price. The stock can give capital appreciation from here on as well as good dividend yields.