Dividend yield stocks score high marks on safety quotient

There’s little doubt that growing concerns about the possibility of a double-dip recession in the USA and a possible downgrade of certain members of the euro zone have spread to the domestic markets, which have dropped by around 12 percent in the past one month. Those fears were also evident in the fact that so far in August, foreign investors sold a hefty Rs 8,898 crore.

While the continuing economic uncertainty could keep several investors from investing at current levels, it is a good time to consider investing in safer, dividend-yielding stocks.

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Simply put, the dividend yield of a company share is calculated as annual dividend per share divided by the current market price of that share. Everything else remaining the same, when the price falls, the dividend yield increases.

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When investors turn risk-averse, they dive into stocks that have a track record of relatively assured returns of at least 5 percent. However, picking stocks offering steady dividend yields is a good investment option even for the long term.

In the short term, investors benefit from tax-free dividends, in the long term, they also stand to gain from capital appreciation. High dividend stocks are also in a better position to withstand market crashes because if the share price falls below a certain level, the dividend yield improves, tempting investor to buy the stock.

Another benefit of this investing strategy is dividend stripping. A fairly common phenomenon in the equity markets, dividend stripping refers to buying shares of a company when it announces a dividend declaration date, and then selling those shares when they go ex-dividend. The strategy not only provides an additional source of income to investors but can also be used to reduce tax.

To help investors use this strategy, _Firstpos_t analysed around 1,000 companies trading on the BSE and their dividend yields as on August 22. Then we narrowed our list to only include stocks that offered at least more than 5 percent (as of August 22); in addition, these companies needed to have a turnover of more than Rs 100 crore and made profits for the year ending March 2011. Using these criteria, our final list consisted of 44 companies (see table).

On top of our list is HOV Services, a business process outsourcing (BPO) company, boasting a dividend yield of 14.3 percent. It reported a profit of about Rs 54 crore for the year ending March 2011, after making a loss the previous year. Another noteworthy stock is Engineer India, which continued its robust financial performance of the past year into the last quarter: the state-run company posted a 29 per cent growth in net profit and a 41 percent growth in sales in the June-ending quarter. Its dividend yield stood at 6.85 per cent and it is expected to go ex-dividend on August 26.

Another interesting stock is GIC Housing Finance: while its current dividend yield stood at 6.35 per cent, its five-year average dividend yield is much higher – 7 per cent. The company has been paying dividends for the past 19 years.