Cherry picking: Are high dividend yield stocks back in demand?

Global economic volatility, rising commodity prices and galloping inflation have put investors in a dilemma over where they must park their funds. Should they invest in equities, debt or bonds? Or is there an investment alternative that could meet investors’ expectations?

How about high dividend yield companies?

Dividend yield is a ratio that shows how much a company pays out by way of dividends each year relative to its share price and is calculated as annual dividends per share/price per share. A high dividend yield tells us what percentage return shareholders get in the form of dividends.

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To ascertain the above, we have picked stocks that are part of the BSE 500 in order to ensure that these companies have a sound financial track record. However, specific shares like Patni Computers, India Bulls, Hero Motor and a few others have been kept out of our list as they had a high dividend yield owing to a one-time special dividend. We have calculated the average dividend yield of our companies over a 5-year average to ensure there is no discrepancy in our sample. The stocks’ share price has been taken on 29 July, 2011. However, all the companies in our sample have already gone ex-dividend. Investors could look at the 5-year average dividend yield before they decide to plunge into these stocks.

Firstpost has chosen the top 25 stocks that have a dividend yield of more than 4 percent, higher than the average dividend yield of 1.5 percent of BSE 500.

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In the current economical turmoil, it is always beneficial for investors to change their investment strategy in line with changing circumstances. Dividend yield is a good investment option, both for short and long terms. While in the short term, one can benefit from dividend inflow, investors could also stand to gain from capital appreciation over a longer timeframe. Also, high dividend yield stocks are in a better position to withstand market falls. If the stock slips below a certain price, its dividend yield goes up.

A common strategy in the market is to pick up shares when the announcement is made by the company and sell those after they go ex-dividend, a method know as dividend stripping.

So, this brings us to the next question, which stocks to invest in. Listed below is the financial performance of some of the companies in our table :

•Wyeth : A pharmaceutical company - part of the Pfizer Group - has a market capitalisation of Rs 2,294 crore. Its revenue rose 35.8 percent to Rs 636 crore, net profit jumped 40.3 percent to Rs 165 crore for the year ended March 2011. The company has been paying dividends since 1991.

•Tata Elxsi: Part of the multi-billon dollar Tata Group, it is a technology design company that provides customised design solutions to companies in the media, healthcare, communications and consumer product segment. While its profits have declined over the past two years, the management expects revenues to grow 236 percent to Rs 1,400 crore by FY13-14. It has been paying dividends since 2000.

• Chennai Petroleum Corporation (CPCL) : Dividend yield was above 5 percent based on our calculations as on 29 July while the average yield stood at 4.4 percent. The firm has been paying consistent dividends since 1989, barring 2008-09 where it ran up a loss.

• Aarti Industries: It operates within the dyes, pigments, agrochemcials, pharmaceuticals and rubber chemicals domain. It has a market cap of Rs 390 crore and its 5-year Compounded Annual Growth Rate (CAGR) revenue was 114 percent, while net profit stood at 109 percent. It has been paying dividends since 1991.

• NIIT Technologies: A mid-tier IT company with a market cap of Rs 1,332 crore. It trades at a P/E ( price per earnings ratio) of 11.9 times, lower than the industry level of 22 times. For the year ended March 2011, its revenues climbed 35 percent to Rs 1,232 crore while net profit shot up 45 percent to Rs 185 crore. The company has been dishing out dividends since 2004.

Investors could also look at specific banks like UCO and Andhra Bank whose dividend yields stood at 5.46 percent and 4 percent, respectively.