How to identify High Dividend Yield stocks for long term investment?
Stocks are zooming in current bull run. Last week there was a market correction for a few days and investors would have worried about their stock market investments. One of the safest ways to invest in the stock market is investing in high dividend yield stocks. Investing in high dividend yield stocks would help investors as these would give some cushion against volatility. In this article, I would elaborate about High Dividend Yield Stocks and how investors would benefit from investing in such stocks.
What are High Dividend Yield Stocks?
If you are already familiar about them, you can skip this section.
- Dividend paid at a ratio of profit is termed as dividend yield.
- Companies which has solid fundamentals and are paying high dividend are termed as High Dividend Yield Stocks here.
- These companies are providing consistent dividends over the past few years.
How to identify High Dividend Yield Stocks for long term investment?
a) Dividend payout ratio < 40%: Dividend pay out ratio is nothing but the dividend distributed from the profits for that year. E.g. if a company earned Rs 100 Crore profits and distributing Rs 30 Crore as dividend, dividend payout ratio is 30%. This is nothing to do with share price or face value of the share. Generally, companies would distribute part of their profits as dividend to shareholders and use balance profits for growth of the company. Means, lower the dividend payout ratio, higher the changes in the company for growth as such money would be used for expansion purpose.
b) Dividend Yield > 3%: Dividend yield is the amount received towards dividend over the current share price. Dividend yield > 3% is considered for short listing the stock.
E.g. if a company share price is Rs 200 and it has declared dividend of Rs 10 per share, its dividend yield is 5% (10/200). This provides some cushion against volatility.
c) Sustained dividend per share in last 5 years: If the company is providing sustained dividend per share in last 5 years, this could be considered as one of the parameters. This would prove that a company has solid fundamentals and consistently performing well.
d) Market capitalization > Rs 400 Crores: Market capitalization is the total value of company outstanding shares. It is the simple arithmetic of outstanding shares issued by the company at market value.
E.g. if Balmer Lawrie share value is Rs 543 per share and total shares of the company are 1,000, market capitalization would be Rs 543 x Rs 1,000 = Rs 543,000. Any company where the market capitalization of > Rs 400 Crores are considered here for a short listing a stock.
e) PEG < 1.5: Price to Earnings growth (PEG) is key ratio that is used to determine the time it would take for an investor to double the money with such stock investment.
E.g. Company-1 has P/E ratio 20 times to its 12% earnings in next 5 years. PEG ratio would be 20 / 12 = 1.66
Company-2 has a P/E ratio of 30 times with a 40 % earnings estimate for next 5 years. PEG ratio would be 30/40 = 0.75.
Now Company-1 stock price is higher than earnings growth and your money does not grow faster. On the other hand, Company-2 has 0.75 PEG which is undervalued as the ratio is < 1.5 and is always good for investing now.
Another example is Balmer Lawrie has a PEG ratio as 1.59 and Deepak Fertilizers has 0.49. Both are good, however Deepak Fertilizers scores high in this parameter as it has a low PEG ratio.
Why should you invest in High Dividend Yield Stocks?
- Supports against market volatility
- Good returns by way of dividends even when you hold them for the long term
- Dividend received is tax free income
What precautions you should take while investing in high dividend yield stocks?
- Don’t just consider high dividend yield and invest in them.
- You need to take into consideration all parameters like dividend history, PEG, market capitalization, etc. Without them, such list is meaningless.
- Abnormal income should be ignored as it is only temporary for that year.
- Avoid companies which distribute maximum dividend out of their profits as there is less scope for expansion for such companies.
Top-10 High Dividend Yield Stocks which meet all these requirements are enclosed in below chart. Investors can review and consider investing for the long term.
(Source: Data compiled by me from various websites)
Conclusion: Take a pen and paper and short list High Dividend Yield stocks for long term investment from this list which meets your requirement. Instead of timing the market, better to invest in low PEG ratio stocks which can help you to grow your money faster. Such, High dividend yield stocks can help your money to grow faster along with providing a cushion against volatility by benefiting through higher dividend.
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How to identify High Dividend Yield stocks for long term investment
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