Let us at the very outset clarify, that the companies mentioned below are not the best paying dividend companies in terms of dividend yields. What we want to clarify is that the divided yields of these companies are very high, but, not the highest. There are many companies that give you higher dividend yields, but, we are not sure of their fundamentals. Sometimes, the dividends paid are one-off, due to sale of an asset or a stake sale in the company. So, we have ignored those companies as well. The ones chosen are based on high dividend yields, as also strong fundamentals.
Why chase dividend yields?
You should chase dividend yields for the simple reason that dividends are tax free. So, while most of the debt instruments are taxed in India, dividends received in equities is not taxed in the hands of the investors. Of course, companies pay dividend distribution tax, which you should not worry about. Secondly, some companies can offer you very high dividend yields, that even beat bank interest rates. And sadly enough, bank interest rates have fallen in the last few years from as high as 9.5 per cent to just about 7-7.5 per cent, every year.
Among the fundamentally strong companies with a very high dividend yield, is the government owned National Mineral Development Corporation, more popularly known as NMDC.
The company last paid a dividend of 1100%, which takes the dividend yield to 9.4 per cent at the current market price of Rs 116. The fundamentals of the company are also sound, which is one of the most important factors, you should consider before chasing a stock. In fact, the stock is trading at a price to book value of 1.1 times.
Other fundamentals of NMDC?
NMDC is a cash rich company sitting on a pile of cash. In fact, the company is into the iron ore mining business, which itself is a high margin business. It has a record of paying hefty dividends year after year, because of the nature of the business. We recommended this stock also because its fundamentals are strong. The company reported a good performance for the quarter ending June 30, 2016, which saw net profits rise to Rs 711 crores, from 552 crores. The EPS for the quarter was Rs 1.79. Even if the company does an EPS of Rs 7.2 for the full year, the stock is trading at a p/e of 16 times at the current market price of Rs 117. This is neither cheap nor too expensive.
Coal India is in the same business of mining, like NMDC, but mines coal. Once again the story is not too different from NMDC. Solid cashflows, hefty dividend and a cash rich company, that will always be cash rich because of the nature of the coal mining business. This is one stock that tends to move in a very tight range. In fact, the 52-week high of the shares is Rs 349 and the 52-week low of the stock is Rs 272.
Last year, Coal India declared a dividend of 274 per cent, which takes the dividend yield to 8.72 per cent on the current market price of 313. Now, this is higher than even bank deposits, and dividends as we all know are tax free in the hands of investors, while bank deposits are not. Of course, share price has the risk of falling, which will eat into your returns. But, if the share price climbs you tend to get your returns from capital appreciation and the dividends as well.
Fundamentals of Coal India
Coal India as we mentioned is a sound, cash rich company, that has a mountain of cash. The company has some solid coal mining blocks, which should keep it occupied for many many years. The stock we believe is a little overvalued in terms of price to book and price to earnings multiples. However, the shares are unlikely to fall too much given that investors would buy the shares, purely on account of its dividend.
Bharat Petroleum Corporation Ltd (BPCL) is one of the top oil refining companies in the country. The company has benefited immensely from the drop in crude oil prices from levels of $100 per barrel to the current levels of $50. We believe that going forward there is further hopes of crude prices dropping, which should boost profitability of the company.
Coming to dividend yields of the company, BPCL gives you yields of as high as 4.5 per cent at the current market price.
Strong on valuations
The company has been managing to report whopping net profits, quarter after quarter. In fact, the company reported a net profit for the quarter ending June 30, 2016 of a staggering Rs 2,620 crores, from the previous quarter of Rs 2,549 crores. The EPS for the quarter ending June 30, 2016, translated to Ts 18.12. Even if the company reports an EPS of Rs 70 for the full year 2016-17, the stock is trading at a p/e of just 10 times, one year forward earnings. A good stock to buy at the current levels, based even on fundamentals. However, the only threat that the company may face is the rally in crude prices.
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