“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D Rockefeller.
When a company makes profits, it usually pays out a part of its profit as a dividend. This can vary if the company’s profit varies, or like in some companies, the profit itself has to be re-ploughed back into the company for growth. But there are companies that consistently pay dividends, and distribute a certain amount of profit each year. The
If the current share price is Rs. 100 and the company pays Rs. 2 per share, then the dividend yield is 2%. This is hardly revealed by companies – they often talk about dividends as a percentage of the ‘face’ value, which is not relevant nowadays. Or, some will tell you what percentage of profits they distribute. But what you care about is: if I put in Rs. 100 how much can I see as cash flow per year if I continue to hold the stock?
The answer for most Nifty companies is about 2%. However, there are a number of companies that don’t need to reuse profits, and that consistently distribute so much of their profits that it makes sense to hold on to them for the cash flow.
Remember that if a share price goes up, it’s only a bonus, since the dividend yield is not intended for a near term sale. But a growing company can be a great dividend yield company too – if a Rs. 100 company pays a 2% consistent yield and the share goes up to Rs. 300, the new yield is Rs. 6 per share (at 2%). If you bought at Rs. 100, for you the yield has gone up to 6%!
Example: Hero Motocorp
In 2002, Hero Motocorp (then Hero Honda) declared a dividend of Rs. 17 per share. Then in 2003, it paid our Rs. 18 per share. They had decided to pay more than 50% of their earnings, and the share price was Rs. 300 or so. That would mean a dividend yield of 6% (Rs. 18 per Rs. 300)
Since then the dividend payouts have been:
• 2004 to 2009: Rs. 17 to Rs. 20 per share. (6% yield on the Rs. 300)
• 2010 and 2011: Rs. 105+ per share. (35% yield)
• 2012 to 2015: Rs. 45 to Rs. 65 per share (15% to 22% yield)
The share price has gone to Rs. 2600 which is an 8x increase, but the yields are excellent. Buying the stock just for dividend yield was a good idea – since even 6% is good, but the bonus has come as the economy has grown and helped the company’s profits.
The Capital Mind DivYield Portfolio
At Capital Mind Premium we have come up with a portfolio of stocks paying high dividends, particularly aimed at the income seeking investors. We have put a threshold yield of 4% which is also the current savings bank account interest rate. This is a less volatile investment strategy, which we would be monitoring on a regular basis and add/remove stocks to boost the dividend yields.