There are two popular ways to generate returns from stocks: 1) when your capital appreciates with share price growth, and 2) 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, is 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 looking for a steady income.

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 and companies with the highest 1-year dividend yield over the past year. The full high dividend screener is here.

Aster DM Healthcare gives a special dividend after sale of its Gulf business

Healthcare facilities company Aster DM Healthcare announced a special dividend of Rs 118 per share from the proceeds after the sale of its Gulf business. Its share price rallied after the company completed the separation of its India and GCC businesses on April 3. The management said the Indian healthcare market looks promising and, after segregation, the company would focus on increasing its footprint in India. 

Through both greenfield and brownfield opportunities, the company aims to take its total bed count in India to more than 6,600 in the next three years. The expansion plan will encompass the upcoming Aster Capital in Trivandrum, and Aster MIMS Kasargod projects, and adding bed capacity to existing hospitals. The healthcare company will also be looking at potential markets such as Maharashtra and Uttar Pradesh – while UP is a demographically younger market compared to South India, it is highly underserved when it comes to health facilities. The capital allocation for this expansion is in the range of Rs 1,000 crore.

Indian Oil & its subsidiary Chennai Petroleum Corp. deliver the highest dividend yield among oil & gas companies

The oil & gas sector had a dividend yield of 1.7% in the past year. Companies in the lead are Indian Oil Corporation, Chennai Petroleum Corporation and Bharat Petroleum with dividend yields of 7.2%, 6.1% and 3.8% respectively. It is important to note here that central public sector enterprises must pay a minimum annual dividend of 30% of profit after tax or 5% of net worth, whichever is higher as per guidelines given in 2020.

In FY24, Indian Oil gave a 4X higher dividend of Rs 12 on a YoY basis, thanks to the cheap Russian crude that boosted gross refining margins over the past year. However, Trendlyne’s Forecaster estimates that the dividend per share will fall to Rs 6.8 in FY25. This is because discounts have almost halved to $3-6/barrel from $8-10/barrel in FY24, mainly due to higher freight and insurance costs because of Ukrainian drone attacks. This is evident in the net profit of oil & gas companies in Q1FY25. Indian Oil saw its net profit decline 75.6% YoY, while Chennai Petroleum’s net profit declined by 35.8% on a YoY basis.

Bharat Petroleum also saw its net profit decline by 73.3% on a YoY basis in Q1FY25. Trendlyne’s Forecaster estimates the company will lower its dividend payout by 35.7% in FY25 compared to that in FY24. However, due to inflationary headwinds and a slowing global economy which might even lead to a recession in the US, crude oil prices are trading below the $80 level. This can be a major tailwind for refining margins and profitability, leading to potentially higher payouts/dividends.

Vedanta’s dividend yield takes a hit, as it aims to deleverage balance sheet

The metals & mining sector on the other hand had a dividend yield of 2.1%. Companies with the highest dividend payout in this sector are Vedanta, Coal India and NMDC with yields of 6.3%, 4.9% and 3.9% respectively. All three companies saw their share price nearly double over the past year.

Contrary to the estimate beating dividend per share payout of Rs 101.5 in FY23, Vedanta missed the FY24 dividend payout estimates by 17.1%. This comes as the debt-heavy mining company works to deleverage its balance sheet via strategic demerger and asset sale. In Q4FY24, the company reduced its debt by 10% on a QoQ basis and improved its net debt to EBITDA ratio to 1.5X from 1.7X.

Meanwhile, the banking & financial services firm had an overall dividend yield of 1% in FY24. The top dividend-paying stocks in this sector are ICICI Securities, UTI Asset Management Company and Ujjivan Small Finance Bank, offering yields of 5.2%, 4.8% and 3.5% respectively.

Among the stocks that made it to the list, only Ujjivan Small Finance Bank’s share price fell over the past year.

It’s worth noting 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 a lack of significant expansion plans. Companies that pay dividends are typically considered more stable and financially sound and, historically, dividend stocks have proven to be a safe bet during market downturns.