Why Dividend Paying Stocks May Not Be The Right Bet Now?

At a time when there is a lot of pessimism with regards to equities, many analysts are suggesting to invest in dividend paying stocks. However, most of these analysis is based on the past track record of dividends, which may be a little risky to go by.

Dividend uncertainty

Most of the high dividend yielding stocks from the government owned companies. Typical examples include Coal India, Indian Oil Corporation, Oil India, ONGC, NMDC, HPCL, PFC, REC etc.

If you go by the previous years dividend track record, all of these stocks yield dividends in the range of 6 to 12 per cent. The pertinent point here is that the past track record cannot be an indication for future performance. Dividends of these companies are likely to remain much lower for the Financial Year 2020-21.

Let's take a few examples here. ONGC, has declared a total dividend of Rs 5.75 per cent for the FY 2020. Based on the same the dividend yield is around 9 per cent, based on the current market price of Rs 63.

It is hard to see how ONGC could declare the same dividend in 2020-21, given the huge slump in oil prices from $60 to $30 per barrel. NMDC on the other hand, which is also available at a solid dividend yield of 7 per cent, based on last year's dividend may not be able to retain the same dividend as last year, given that it has been reducing iron ore prices.

What we are trying to tell readers is that if you are going to calculate the dividend yield on last year's dividends, it is unlikely to be helpful. There is business uncertainty and dividends are likely to be lower and hence do not go on the past track record to calculate dividends.

Having said that there are a few stocks that may continue to declare dividends and not much is likely to change for some of them. One of them is Coal India, which may continue to declare healthy dividends as coal demand would continue. The stock is available at a dividend yield of around 9.16 per cent, which makes it very attractive.

Dividends are no longer tax free

Dividends received after April 1, 2020 would now be taxed. This is also one advantage that would disappear. Prior to April 1, dividend distribution tax were paid by the companies, but, now the same would be paid by individuals. So, one needs to keep in mind the same before investing. If you are already in the highest tax bracket, buying shares of high dividend paying companies may no longer make sense.