Stocks To Buy: Stock That Gives A Dividend Yield Of 12%, Upside Potential Likely

Markets are very close to their record highs and the Sensex is firmly back above the 61,000 levels. At times, it is good to look at stocks that give a good dividend yield and have the potential to rally from here. In the future, the dividends are unlikely to be 12% because of a de-merger, though high yields of 8% are possible.

NMDC: Dividend yields of 12% currently

For the FY ending March 31, 2022, NMDC declared dividends two times. The first was a dividend of Rs 9 per share in the month of December and again a dividend of Rs 5.73 in the month of Feb 2022, taking the cumulative dividend to Rs 14.74 per share. This works close to 12.85% dividend yield, which is exceptional. The point that one needs to make now is whether the dividends would be retained in the coming years. It is hard to say and largely depends how iron ore mining pans out in the coming years. In fact, the demand for iron ore has surged and if prices remain firm, the company is likely to post good quarterly numbers and hence dividends.

Future dividends likely to be lower, but yields could be 8% and above

There was a demerger of the steel division of NMDC for which the company's shareholders will get an additional share of NMDC Steel Limited, which possesses the steel plant (1:1 ratio) i.e. NMDC transfers the steel plant at book value, which is around Rs 190 billion (Rs 65 pershare), and debt of around Rs 17 bn. Brokerage firm, Edelweiss has maintained a buy on the stock.

"We reckon NMDC would clock around 8% YoY volume growth in 2HFY23 amid increased demand for steel. Meanwhile, we expect iron ore prices to remain subdued, which is factored in our estimates. NMDC would likely pay higher dividends of Rs 10 per share," Edelweiss has said.

Even if we work on the assumption of Rs 10 per share dividend, post the demerger, the dividend yields could still be in the viscinity of 8.69% based on the current market price of Rs 114.

Shares drop from 52-week highs

The shares of NMDC have dropped significantly from 52-week highs on account of the de-merger. The shares have fallen from levels of Rs 175 to the current levels of Rs 114. At these rates the stock may look attractive for long-term investors. However, if a global recession does play out, there is a high possibility that iron prices could drop and hence the share price would as well.

Disclaimer

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