India’s dividend czars: Don’t just go by payout, look at ROE, ROCE

The only thing that gives me pleasure is to see my dividend coming in.
– John D. Rockefeller.

Dividends are normally paid out once a year, but some companies choose to announce and pay dividends semi-annually. Dividends are a significant advantage to stock ownership, whether you use them for immediate profits or reinvest them for buying additional shares.


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.

Dividends are an essential reflection of a company’s value since they are a form of cash flow to the investor.

A variety of factors influence the dividend policy of a company such as the firm’s risk, cash flow situation, cost of debt and equity, growth opportunities, taxes and others.

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.

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.

We did an analysis and dividend yield-based ranking of companies with a market capitalisation of Rs 500 crore or more. And here is the list of top 15 companies with highest dividend yields that our study threw up.

Following are the key findings:

• 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.
• PSUs have a significant one-year returns on their stocks, but when it comes to long-term investing, they are not so rewarding as the private sector stocks.
• 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.
• We cannot judge a company’s equity performance by the dividend yield alone.

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.

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.

(Ajit R Sanghvi is Director of MSS Securities. Views are his own)