HOW TO SELECT A DIVIDEND YIELD STOCK?

Tweaking

The

Dividend

Yield

Strategy

For

Higher

Returns

We usually look around for Dividend Yield stocks when the markets are in a bearish phase. The prices
are down and the dividend yield is high. They are an ideal investment strategy to survive in a bear market.
With just 348 points down in the Nifty from the highs of 6229 that we saw last month, we are not exactly in
a bear market as we are just 5.5% down from those highs. The markets need to shed another 14.5%
more to qualify as a bear market.
But can we tweak our dividend yield strategy in a way to serve the present day market?
Yes. There are two ways to do it
1.Average it lower
Lets take an example. A stock that quotes at Rs 113, a dividend of Rs 5 per share is payable in July. The
dividend yield on this stock now comes to 4.4%. If the same stock would fall to Rs 100, the yield at that
price would rise to 5%. So buying in a staggered manner, could increase the overall yield and also lower
the average acquisition price. So dont buy in one go. Buy only 50% now and buy the rest after a 10% fall.
2.Extend the investment time to 13 months.
Since most Indian companies follow the financial year, they close their books in March, announce their
results and dividend in April-May and Pay out in July-August.
So if we buy the stock, in the example above at Rs 113. We will get Rs 5 as dividend in July 2013. But if
extend our investment time to July 2014, we will get another dividend of Rs 5 per share.
So in a period of 13 months, we get tax free income of Rs 10 per share. Considering the investment
period of 13 months, the yield comes to 8.84%. But if annualised, it comes to a yield of 8.16% p.a.
The trick is in the art of selling. After the stock gets ex-dividend, the share loses value to the extent of
dividends paid. But if we wait for some time the price rises to compensate.
Dividend yield strategy is an evergreen strategy for all seasons for the following reasons
1. Steady
income
of
2. Dividend
is
tax
3. Since there is steady income, you can afford to wait for the capital appreciation to happen

dividends
free

But before we choose a good dividend yield stock, we should also look at the following
1. Consistency
2. Quality
3. Ability
4. Chances

of
of
to

pay
of

in
capital

the

dividends
dividends
future
appreciation

We have chosen two stocks for you. Both are from the financial sector and both are PSUs - Dena Bank
and GIC Housing Finance.
Dena Bank has proposed Rs 4.7 per share dividend. At the CMP of Rs 84, the yield comes to 5.6%. The
company returned to the dividend list in 2007 and has been continuously hiking its dividend each year.
Net Interest Income has grown at a CAGR of 17.6% for the last five years. Available at attractive valuation
of 0.5 times its current book value.

While the net NPA is 1.39%, they can rise going forward as the bank has a 16% exposure to the
beleaguered power sector. The question now arises, can the Bank continue to pay higher dividends
going forward?
There is some comfort from the pay-out ratio. While the bank hiked the dividend from this year to 47%
from last years 30%, the pay-out ratio is still low at 21%. The highest pay-out ratio we have seen
amongst the PSU Banks this year is 50.8%. This leaves enough elbow room for the dividends to be
maintained if not hiked.
The other stock, GIC Housing has proposed a dividend of Rs 5 per share. This is higher from last years
Rs 4.5%. The yield comes to 4.4%. The company has been paying dividends continuously from 1993.
While the company has not specified the gross NPAs it has its net NPAs are nil. More importantly, the
company made a higher provisioning this year. Despite paying a higher dividend, the pay-out ratio has
reduced from 44.7% last year to 31.7% this year.
You may choose one to suit your risk profile. As and when the economy improves, these stocks are likely
to give you capital appreciation as well.
Have an exit strategy
Even though you may be comfortable accumulating and holding the stock for the longer term, it pays to
have an exit strategy in place.
Whenever and at any point, the stock gives you five times its dividend yield in terms of capital
appreciation, go ahead and book profits.
But if the ex-dividend price rises quickly to the cum-dividend price, you can consider booking profits early
also, even after the first dividend.

Dividend Rs.

Divi
Payout
%

Div.

ROC Net
E

Sto 201 201 201 201 200 FY1 FY1 Pric Yiel FV EPSP/E P/B %
cks 3
2
1
0
9
3
2
e
d
V
DEN 4.7 3.0 2.2 2.0 1.2 21.0 13.4 84
A
BAN
K

NPA

5.6 10 22. 3.7 0.5 17.6 1.39

%
4
6
%

GIC 5.0 4.5 4.5 4.5 4.0 31.7 44.0 113 4.4 10 15. 7.1 1.1 12.3 0.00
HSG
%
8
6
By
Head
HDFC securities Ltd

Mr
Private

Broking

&

V.K.Sharma
Wealth