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.
Also Read: How to pick blue chip stocks for long term investments?
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.
Also Read: How to invest every month in a stock through Systematic Equity Plan (SEP)?
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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Suresh
How to identify High Dividend Yield stocks for long term investment
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what an excellent job you done honestly you are a gentle person I salute you for your article.I hope after a few year you will trend lot of people
Thank you Deependra
whats your view on buying 1BHK flat at starlit suites. They rent it out and pay us monthly income. this will continue till agreement comes to an end. we can sell the property in between provided we find buyer who agreed to deal with starlit. what is your view on this? Pros and Cons would be highly appreciated?
Dear Suresh
Greetings for the Day…..
I got lumpsum amount of 75000/- I want to invest in J&K bank for long term prospective. what is your opinion on this. pla suggest.
Reg .
Ranganath
Good stock to buy. However don’t invest lump sum even here when markets are going peak. You can accumulate such stocks over a period of time.
Dear Suresh,
Thank you for the suggestion. I shall stick on to SEP way
I have A/c with FundsIndia. Is it possible to reinvest dividend (Dividend yield) of stocks to reinvest to buy shares.
Thanks and regards
Ranganath
Ranganath, It is manual process, but you can do that
Hi Sureshji,
I want to start investing in stock market. I am very new to this and can invest 50K. Can you please provide me some stock name to start with some profit gaining. Also, please provide some tips to deal with future & option and mistake an investor should not do(Best practices).
Dear Suresh
Greetings for the day….
Could you please tell us more about companies with moat. Is it worth investing in companies with economic moat for long term investment.
Thanks and regards
Yes, it is worth investing in companies of Moat. Refer this article. https://myinvestmentideas.com/2013/05/invest-in-companies-with-strong-and-sustainable-moat/
Thank u suresh nice article…
Suresh,
Can you please share how you get the PEG ratio of a company? I have tried to get this information but have’t found a source as yet. I mean I know the PE ratio as of today but how/where do you get the earnings estimate for the next 5 years. Or can you calculate it based on previous 5 years PE? And if so what is the growth factor that you will apply?
Actually you could do a complete article on how to calculate the PEG ratio of Indian companies.
Thanks
Hi Suresh,
Very nice article. I would like to ask you one more thing. What you think would be the CAGR of the above listed companies if you take into account the dividend? Would be nice if you have some info & share that too. As an investor anything with a CAGR >25% is really good. If you take this into account, I believe you will have stocks like Asian Paints etc. in the list.
Looking forward to your comments.
Thanks
Milind
Good point. Yes this could be one of the important parameter. If you see my other artilce on identifying blue chip stocks, it considers it.
Very Useful article. But have a clarification on Dhunsri Petrochem…Is it a Petro Chem company or dealing with Tea. Also please guide if this stock has made good profits so far since this is much undervalued and more volatile in nature (ranges from 80 to 187 at peak and now around 100). Request your advise if I can go for SEP or regularly invest some money whenever there is correction
Nice & useful article Suresh.
Please give your analysis on Aviation Stocks
Dear Suresh,
Greetings for the day.
What is time frame for long term investment. Are these Tax free if so what is minimum period to hold.
I am buying demat a/c from FundsIndia. Can I Invest in 5 of above stock through them and make it SEP only in High dividend yield stocks .
Thanks & Reg
Ranganath
Ranganathan, invest for 5+ years. Yes you can do SEP. The dividend is tax free.
Dear Suresh ,
Thanks for your informative blog.Can u pls help me regarding non receipt of dividend. I am having ENGINEERS INDIA shares since feb14 after that company has announced dividend twice (ONE INTERIM AND ONE FINAL )but i have not received till date. I got these shares in FPO. Can u pls tell me how to get this clarified from company
Manoj, Generally this does not happen. Which bank account your demat account linked to ? This would get credited through ECS in such bank account. If not, you may need to talk to demat account broker about this. They can help.
Thanks for the analysis. I will invest on these shares. How long do you think, we need to invest in these shares?
Sri, good to invest for long term of 5+ years. Investing during correction is better
Dear Sir,
Your articles are really of great help, can you please elaborate full names for “REC” and “PFC”.
Thank you.
Rural electrical corporation snd piwer finance corporation
Hi Suresh
Great… Good analysis. Thank you
Regards
Renganathan
Thank you so much for this nice article.
I have a question. Where from do you get all these data? Can you please tell us how do you do such analysis?
Can you recommend some websites or books that we can go through to learn all these things?
Thank you so much.
Also thank you for your reply to my last post. Much appreciated.
Priyanka, It is trade secret. I generally browse several financial sites, blogs and analyse which could be best in current investment cycle. Some could be best bet and some could go wrong.
Suresh je, very very usefull. U can add oil india, gic housing finance, andhra bank. If we invest systematically in ur list of stocks after 15 years the invested amount easily taken back as dividend… very very usefull article. Thks a lot on behalf of other investors too. Pl pl put more articles on dividend yield stocks regularly. If one invest reg , in these stocks no need for pension plans
Good thoughts Sudhakar