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India's Dividend Czars - Don't Just Go by Payout, Look at ROE, ROCE - The Economic Times
India's Dividend Czars - Don't Just Go by Payout, Look at ROE, ROCE - The Economic Times
ETMarkets.com
The only thing that gives me pleasure is to see my
dividend coming in.
– John D. Rockefeller.
Sanghvi.
The dividend yield financial metric assesses a dividend payout and allows to
compare it with payouts on other stocks.
Dividend yield isn’t an indication of ‘good or poor’ stocks. Rather, the formula
is used to assess the risks and benefits of investing in a business and to
determine which stocks meet investment objectives.
Dividends are also significant since they can help investors determine what
worth a business is. The dividend discount model is a classic formula that
describes a stock’s underlying value. It’s a key component of the capital asset
pricing model, the foundation of corporate finance theory.
According to the model, a share is worth the amount of all future dividend
payments ‘discounted back’ to their net present value.
Since last year, Indian shareholders are liable to pay tax on the dividend
income. Dividends collected from Indian companies were tax-free until March
31, 2020. This was because the companies declaring the dividend had already
paid the dividend distribution tax (DDT).
The Finance Act of 2020 modified the way dividends are taxed. Dividends
earned on or after April 1, 2020, is taxable in the investor’s hands.
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Companies that pay out high dividends and are growing their earnings make
good combination for producing superior shareholder returns. An analysis
suggests companies with both high payout ratios and earnings growth
outperform in terms of shareholder returns.
On the other hand, companies with high payout ratios, but weak earnings
growth tend to underperform.
ET CONTRIBUTORS
The top companies’ average yield stood at 10.77%, the highest being 16.99%
given by Polyplex Corporation.
Most of the companies on the list are the PSUs, as the mandate issued by
the central government makes them pay regular and healthy dividends.
All the top companies on the list are well-established (operating for at least
10 years) as most of them reinvest their profits to expand their businesses.
As this list showed, equity returns for the past one year turned out to be much
more than the returns of the past 5 and 10 years. These numbers clearly show
that the stocks have performed well in the last one year and that resulted in
higher returns.
Now, let’s have a look at the list of companies that have paid highest
cumulative dividend for the past 25 years.
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ET CONTRIBUTORS
A comparison of the list of companies with high dividend yields and the one of
stocks paying consistently high dividends over the years shows HUL and
HDFC stand out with highest 10-year returns of 24% and 20%, respectively,
even with lower comparative dividend yields. They also have very high ROE
and ROCE. RIL and Infosys come next with 15.5% and 14.3% 10-year returns,
respectively.
High dividend yield stocks have performed well in the last one year, but to find
consistent compounders or companies that can give both healthy dividends
and decent capital appreciation, one needs to invest in those that consistently
pay high dividends and have high ROE and ROCE. HUL, HDFC, Reliance,
Infosys with good earnings growth and liberal dividend payouts stand out on
this count.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions
expressed here do not reflect the views of www.economictimes.com.)
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