Companies rushing to pay high dividends: Should you buy these stocks?

By Hiral Thanawala

High-dividend stocks are normally good investments, but this may not be true in the current situation. The Budget proposal to tax dividends exceeding Rs 10 lakh in a year has led to a flurry of dividend announcements by corporate houses. Many companies want to pay out hefty dividends before the proposal becomes a rule in 2016-17.

But experts say that the dividend yield alone should not make you buy a stock. Vikas Gupta, CIO of Arthaveda Fund Management, says the dividend payout and the dividend coverage ratios are better indicators than just the dividend yield of a stock.

High dividend stocks assure stable returns even in a volatile market or bear market scenario. However, companies declaring very high dividends from their profits are best avoided, since they might not retain enough profits to invest in their future growth and expansion plans, which, in turn, would limit the upside of stock prices. Companies that have unstable dividend policies are also unreliable, since they may be declaring onetime dividends to gain investor interest.

Others are of the opinion that that one should not lose sight of fundamentals. “Buy a stock based on its fundamentals and other qualitative factors,” says Suhas Patil, Founder of Sanmati Investments. The price to earnings (PE) ratio is a good indicator of its value.

Patil says one should also look at the price to book value (P/BV) and price to sales (P/S) ratios for comparison. A lower P/BV signifies that the company is fundamentally weak. On the other hand, a lower P/S ratio indicates that the stock is undervalued. Further, return on equity (ROE) indicates the amount of profit the company has generated with the shareholders’ funds.