There are two popular ways to generate returns from stocks: capital appreciation through share price growth, and dividends. Investing in dividend-paying stocks gives you a share of a company’s profits through regular cash payments. Such high-dividend stocks serve as reliable sources of income.
The dividend yield, expressed as a percentage, indicates the annual dividend payment relative to the stock’s current price. The significance of the dividend yield for a company lies in its ability to attract and retain investors for longer. A higher dividend yield boosts the stock’s appeal, especially for investors seeking steady income, such as retirees.
It's important to note that the dividend yield isn't a static figure; it changes as the stock price fluctuates. A falling stock price can inflate the dividend yield, a factor investors need to consider when analysing this metric.
In this edition of Chart of the Week, we will look into sectors with the highest 1-year dividend yield, and the top three high-yield companies in each sector over the past year. The full high dividend screener is here.
Vedanta tops the list with a dividend yield of 30.7%
The metals & mining sector has the highest dividend yield of 5.2%. Companies with the highest dividend yield in this sector are Vedanta, Hindustan Zinc and National Aluminium Company with 30.7%, 19.8% and 4.8% respectively.
Though Vedanta tops the list, its outsize dividend yield can be attributed to a 20% drop in its stock price over the past year. This shows how a plummeting share price can push up yields.
Vedanta chose to distribute a substantial dividend of Rs 101.5 per share to its shareholders to meet its holding company's financial obligations and debt repayments. This massive payout set a new record for the company.
Moving on to the Zinc major, Hindustan Zinc (HZL), its share price increased by 9.9%. Vedanta holds a 65% stake in HZL as of June 2023. The company’s cash equivalents stood at Rs 10,061 crore in FY23, compared to borrowings of Rs 11,841 crore.
Frequent dividend payouts, with Vedanta being the biggest beneficiary, have transformed HZL from a net-cash company to a net-debt one.
Meanwhile, the utilities sector had an overall dividend yield of 2.4% in FY23. The top dividend-paying stocks in this sector are Power Grid Corporation, CESC and NHPC, offering yields of 5.6%, 4.9% and 3.6%, respectively. All three companies saw their share prices rise by at least 15% in the past year.
Analysts expect IT companies’ high dividend payouts to continue in FY24
Next comes the software & services sector with an average dividend yield of 2.3% in the past year. The top performers in this sector are Oracle Financial Services Software (OFSS), HCL Technologies, and Tata Consultancy Services with yields of 5.4%, 3.8% and 3.2%, respectively.
OFSS’ stock price rose by 39% in the past year, and Trendlyne’s Forecaster estimates its dividend yield to increase by 10 bps to 5.5% in FY24. Dolat Analysis reports that OFSS increased its dividend to Rs 225 per share for FY23, up from Rs 190 in FY22. This marks a payout of 118% of its free cash flow. This is in line with the company’s seven-year historical average of paying out over 97% of its FCF (free cash flow). The brokerage remains optimistic about OFSS' ability to sustain these high payouts.
HCL Technologies saw a 41% surge in its stock price over the past year but did not issue any special dividends. Overall, all three companies have managed to post high dividend yields despite their share prices rising sharply in the past year.
Tobacco giant outperform peers in their sector
Next up, we have the food, beverage & tobacco sector with a dividend yield of 2.2% in the past year. The stand-out companies in this sector are Godfrey Phillips, Godrej Agrovet, and EID Parry (India) with yields of 3.5%, 2.1% and 1.7% respectively. The tobacco major, Godfrey Phillips, saw its share price increase by 81% during the same period. Trendlyne’s Forecaster estimates an 80 bps rise in its dividend yield to reach 2.9% in the next year.
In this sector, two companies, Godrej Agrovet and EID Parry (India), have seen their stock prices fall by 7.8% and 4.8%, respectively, in the past year.
Windfall taxes disrupt oil & gas sector
Finally, we have the oil & gas sector with a dividend yield of 1.4% in the past year. Companies in the lead are Oil India, Oil and Natural Gas Corporation (ONGC) and Castrol India, with yields of 7.2%, 6% and 4.6% respectively.
Oil India’s stock price surged by 51.8% in the past year but Trendlyne’s Forecaster estimates that the dividend yield will remain unchanged at 7.2% next year. However, the company’s financials may face headwinds due to escalating windfall taxes and a decline in the prices of domestically produced, administered price mechanism (APM) gas. Such a cut in APM gas prices could further reduce the company’s revenue realisation.
ONGC is another company affected by windfall taxes. Despite this, its stock price surged by 44.5% over the past year. This spike can be attributed to the company’s acquisition and processing of cheaper Russian oil, which it then exports to different countries, thereby increasing its sales volume. Trendlyne’s Forecaster estimates its dividend yield to rise by 130 bps to 7.4% by next year.
Castrol India also rose by 23.3% during the same period. Trendlyne’s Forecaster estimates a 30 bps increase in its dividend yield to 5% in the next year. According to Motilal Oswal, Castrol India maintains a dividend payout policy that exceeds 70% of net profit, translating into a dividend yield of around 4-5%.
Among the stocks that made it to the list, Vedanta, Godrej Agrovet and EID Parry’s (India) share prices fell in the past year.
It’s worth keeping in mind that there are many reasons for companies to pay out dividends. While some aim to distribute profits back to shareholders, others might do so due to lack of significant expansion plans. Additionally, public sector companies are obligated to pay dividends to their shareholders.
