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An Investment That Is Tax Free And Easily Beats Bank Deposit Interest Rates


In an era where bank interest rates on fixed deposits have fallen sharply to around 7-7.5 per cent, it's difficult to find investment opportunities that can give tax free returns of as much as 10%.

Dividends from National Mineral Development Corporation (NMDC) will now beat interest rate of any of the bank deposit rates in the country.

Shares of NMDC last closed at Rs 87 on the National Stock Exchange, making a yield of near 10 per cent on a dividend of Rs 8.5 per share.

An Investment That Is Tax Free And Easily Beats Bank Deposit Interest Rates
Let's work this with an example. Let's assume you buy 1000 shares of NMDC, you would pay around Rs 87,000.

On this 1000 shares you get an annual dividend of Rs 8500 (company declared Rs 8.5 per share as dividend), which makes the dividend yield of near 10 per cent. Interestingly, dividends are tax free in the hands of the investors, while they are fully taxable in the case of interest on bank deposits. NMDC declared dividend two times each year.

Now, there are two things that we should note. One is that to get the near 10 per cent yield, NMDC must continue to declare the dividend of 850 per cent it did during the last year. Though iron ore prices have been falling, it looks likely that they will maintain the dividend.

The other thing is that the NMDC stock should not fall from current levels, or else it would reduce your yield, due to capital depreciation.

The stock has already fallen to a 52-week low and from these levels, it looks highly unlikely that the stock will fall any further.

All in all it looks an attractive dividend yield stock to buy. Also, remember, if metal prices rally, the share price of NMDC will rally, which means you could also get capital appreciation.

Story first published: Thursday, December 10, 2015, 8:49 [IST]
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