10 crazy dividend paying stocks in Indian stock market (with pros, cons and some FAQs)

History says that high dividend paying stocks outperform the market in long run. When I ask people to invest in this category of stocks, they just look at me with amazement. What they like more is capital appreciation.

Generally, people underestimate the power of dividend income. I have got a live example of a person who is living on dividend income – this man received Rs.180 crores as dividend over the past 35 years.

Let me clear it out.

There are 2 types of benefit from stock market:

  • Capital Appreciation
  • Dividend Income

For a second, imagine yourself as a cattle farmer. You bought a cow, feed it and fetched some milk to earn income from dairy products.

Apart from this, after 2 year, due to high demand of cow in the market, you sold it at double price.

That’s how people earn in the stock market. They buy stocks at low, retain dividends (like the farmer earned from dairy products) and then sell it at high (like the farmer sold it after 2 years).

So the profit earned from selling high is Capital Appreciation Profit and the sum of money paid regularly (typically annually) by a company to its shareholders out of its profits is known as Dividend Profits. In short:

  • Capital appreciation = profit from price fluctuation in stocks = from selling cow at double price.
  • Dividend profits = time to time dividend distribution = income from dairy products.

So while you earn from dairy products you still have that cow but after selling the cow you’ve nothing as a source of income. Same as, while you receive dividends, you still have that stock but after you sell it, you’ve nothing as a source of income.

Truly speaking, nobody gives a shit to dividend paying stocks. They like capital appreciation more than dividend profits.

No doubt profits from dividends are much lower than capital appreciation but what if I say there is a high correlation between both of them.

If you look at the portfolio of the most successful investor of all time – Warren Buffet then you can find that all of the top holdings in his portfolio have high dividend paying stocks with high payout and yield.

But it doesn’t mean that the company with low or no dividends are crap. Here’s the authenticity – World’s most expensive stock (It cost more than 1 crore in INR)Berkshire Hathaway (class-A) don’t pay dividends at all.

“A number of Berkshire shareholders — including some of my good friends — would like Berkshire to pay a cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves” Warren Buffet wrote in his 2012 letter to investors.

The company has paid only one dividend of 10 cents during his reign, in 1967, and Buffett later joked he must have been in the bathroom when the decision was made. Buffett uses that cash to grow company financials that eventually contribute to shareholder wealth. The result is: Company’s stock price increased by almost 700,000% between 1964 and 2016.

So the conclusion is:

  • Company paying high consistent dividends is an excellent company. It’s a universal truth.
  • Company paying inconsistent or low or no dividends may or may not be an excellent company.

However, in this article, I’ll talk about how to find top dividend paying stocks but before let us talk about some pros and cons. And I bet – your every doubt related to dividends will get vanished by you reach the end, if not, leave a comment.

Content:

  1. Financial ratios associated with dividends
  2. Top dividend paying stocks in India
  3. Regular income
  4. Indicator of cash within company
  5. Other corporate actions than dividends
  6. Flaws associated with dividend distribution
  7. Beware of high dividend payouts
  8. Where and How to find high dividend paying stocks?
  9. Some FAQs

Financial ratios associated with high dividend paying stocks

There are only 3 primary ratios associated with dividend:

  • Dividend Yield

A dividend expressed as a percentage of a current share price. The yield is the percentage of a stock’s market price a company returns in dividends. A stock that pays an annual dividend of INR 5 and is trading at INR 100 a share has a yield of 5 percent.

This is the best measure for dividend as compared to others because it takes current market price into account to calculate the ratio. Formula is as follows:

DY = (Dividend/Current market price)*100

  • Dividend Percent

It is the expression as a percentage of face value of the share. This ratio is useful to measure the trend of company’s dividend over a long period as it is calculated on a common base of constant face value. However, some corporate actions like stock split can break the trend. Formula is as follows:

D% = (Dividend/Face value)*100

  • Dividend Payout

It is the part of net profit which is distributed to shareholders. In other words, the percentage of Earning Per Share (EPS) which is paid to shareholders as dividends. In a while, we will further discuss this ratio in detail. For now, just peek the formula:

DP = (Dividend/EPS)*100

Side note: Each ratio has its own importance and sooner or later are used at different phases.

Top high dividend paying stocks in India

No.NameDY %DP %
1 Interglobe Avi 42 83
2 Clariant Chem 21 749
3 Oracle Fin Serv 18 531
4 Hind Zinc 12 143
5 Noida Toll 12 69
6 Indiabulls Vent 10 67
7 NMDC 8 52
8CARE 7.5 163
9 IL and FS 7.5 76
10 Lakshmi Fin 7.5 29

Data is updated on 8 August’16.

I’ll soon show you how to find dividend stocks but before let us talk about some pros and cons associated them.

Regular income

My personal bank account has an interest return of 4%. That is why I keep a very low amount of money in my bank account. In lieu, I like to invest in companies which pay high dividends or in other words, which have more than 4% dividend yield.

Matra is simple: Always keep your money work for you. Non-performing money is all eaten up by inflation.

The government is forecasting an inflation rate of 4.8% by 2020. So if I still keep money in my bank account, I’m in loss of 0.8 (4% – 4.8%). There are many stocks which are consistently paying more dividends than returns on a saving bank account.

For example: take NMDC. The company is paying very high dividends and its dividend yield range is 7% to 11% since last 3 years, apart from this capital appreciation of the stock is also excellent since last few months.

Isn’t it a great alternative than keeping your money in banks?

Indicator of cash within company

The dividend is also a good indicator of cash presence in the company. Net profit is used in 2 ways:

  • Retained earning
  • Dividend payout

Here’s the equation: Net profit = Retained earning + dividends.

Retained earning is that part of net profit which is retained by the company to carry on its operational activity and for further development & expansion.

Dividend payout is that part of net profit which is distributed to shareholders because that was free cash and this shows that company is earning enough to save money for its shareholder after fulfilling its basic operational activities.

Other corporate actions than dividends

There are also many other factors which ultimately add value to shareholders like dividend do. Bonus shares are also be considered as dividends but are paid in the form of equity. Buyback of shares is also an another way to show gratitude towards shareholders. These all eventually add values to shareholders.

Flaws associated with dividend distribution

This is a kind of flaw associated with dividends. After the announcement of dividends, the stock price is compensated on ex-dividend date with the exact amount of dividends announced per share. For example, This year Hindustan Zinc paid the highest amount of dividend of 24 per share. At that time, the stock price was reflected 24 points low on exchanges due to ex-dividend date.

So ultimately you’re benefiting nothing from this corporate action.

Beware of high dividend payouts

Being an excellent company and having an excellent growth prospect is not the same thing. Sometimes the company with high payout lacks of growth in the company.

Why?

Because they had already saturated their potential and there is no other opportunity available for them to grow their business, that’s why they are paying a high amount of money to their shareholder.

Let me name few of them – PFC and REC. They both are a good company with high dividend yield. They lack growth because they are already so much matured that there are no rooms left for further growth.

And the company which lacks growth means that they don’t have the potential to become multi-bagger. Return from capital appreciation will be quite low.

Where and How to find high dividend paying stocks?

I’ll show you 3 ways to find dividend stocks. Each and every source has its own importance.

  • Moneycontrol
  • Screener
  • Google Alerts

Moneycontrol

Don’t underestimate the power of moneycontrol. It is a great hub of information related to stock market. You can get every information about any Indian stock with few clicks but very few people are aware of it.

Moneycontrol has a feature where they segregate the best high dividend paying stocks. It has a whole dedicated section to easily find dividend stocks at one place, that too rank wise. It somewhat looks like this:

Go on, here’s the link to the page – http://www.moneycontrol.com/stocks/marketstats/nsetopdiv

Screener

Screener.in is the best place to filter stocks as per your own personalized criteria. The advantage of screener over moneycontrol is that you can also add criteria other than dividend ratios to filter stocks.

For example, if you want a stock with “more than 20%” dividend payout and “more than 4%” dividend yield then you’ll simply run a query in the query box but what guarantees that the stock is fundamentally awesome.

Only relying on dividend ratios is not the way to get good fundamental stocks. So also add other many ratios like ROE, D/E etc as shown below:

Note – above ratios and % are just for display purpose.

You can also add other queries as per your personal choice. This guarantees that the stock is high dividend paying as well as it has good fundamentals. So screener goes an extra mile.

Related read: How to analyze stocks in not more than 2 hours

Now here comes my favorite one.

Google Alerts

Above 2 sources are one-time use only. In other words, it will be cumbersome to check moneycontrol or run a query on screener again and again, to see whether there is any new dividend paying stocks in the list.

So what if you keep someone to work for you. A notifier.

Google alerts.

Just sign in to google alerts with your Gmail account and add an alert of “dividend announcement” keyword. You’ll receive an email whenever anything related to dividend rolled out online.

Some FAQs

How could I claim my dividend income?

There is no need to claim dividends. The money will automatically get deposited in the registered bank account with your broker. No need to do anything.

However, company will notify you for the same through email, like I receive an email (illustrated below) from ICICI for dividend distribution:

Dear Member,

Payment of 21st Dividend for the year 2015-16 through
NECS / RTGS / NEFT / Direct Credit

At the 22nd Annual General Meeting of ICICI Bank Limited (ICICI Bank) held on July 11, 2016, dividend at the rate of ` 5/- per share was declared for the year 2015-16 payable on or after July 11, 2016.

The details of dividend in respect of your shareholding are as under:

(Details not to be shared)

In case of any discrepancy in details mentioned above, please write to our Registrar quoting your Folio No. / DP ID-Client ID.

Yours sincerely,

P. Sanker
Senior General Manager (Legal)
& Company Secretary

So don’t worry about the dividends.

Where can I find ex-dividend dates?

I prefer moneycontrol app. You can find it in the section named “corporate action” as shown below.

image

Is there any minimum number of stocks or time frame to possess the shares to become eligible for the dividends?

No there’s no such regulation. Even if you have one share of a company and if the company declared a dividend of 20, you’ll be entitled to receive Rs 20. But do mind that you hold the stock on ex-dividend date.

What is the ideal rate of dividend yield and payout?

2% or more than 2% of dividend yield and 20% or more than 20% for payout is considered ideal.

When does a person is entitled to receive dividends?

To be entitled to receive dividends you should hold the shares on the ex-dividend date. You will get the dividends on the amount of shares you hold. That’s it.

How many times dividends are paid in a year?

There is no rule for how many times dividend should be paid. However, many companies follow 2 times dividend policy: Interim and final dividends. Even there are many companies which pay dividends thrice or quarterly, like MRF.

What are the tax liability of dividend income in the hands of shareholders? 

There is no tax in hands of the shareholders. In case your dividend income alone is above INR 10 lakh, then you’re liable to pay 10% tax on it. More information can be found here: http://economictimes.indiatimes.com/news/economy/finance/budget-2016-with-10-tax-on-dividend-income-rush-of-interim-payouts-likely/articleshow/51217301.cms

Apart from this, Dividend Distribution Tax (DDT) of 15% is paid by the company before they pay dividends.

Updated:

The curious reader of the blog had raised good queries in the comment section, so also consider reading the discussion below and also, If you’ve any query then leave back a comment.

  • Shinoj Jose

    Good and informative.

  • kamal

    awesome article ..just loved it

  • Varun

    Just curious…. is it possiblle to live off of only your dividend income? How much do I have to invest to earn a decent income?

    • It’s only possible if you had invested a huge amount of money because high dividend yield stocks attract high prices.

      • Varun

        Hmm. Another thing I want to understand is that dividends are paid out 2-3 times in a year whereas your savings bank credits you monthly provided you kept your balance intact.

        So like (considering ideal conditions) if I have 10 stocks worth rs 100 with 4% dividend yield, i.e. 1000 in total, I’d get 40×3= Rs. 120 per annum.
        But if I keep 1000 in savings bank account, the tota interest is 40×12=480 per annum.

        So how is stock investing any different from keeping my money in savings bank? Even if the yield is high, say 8%, I’d get Rs. 240 which is still less than Rs. 480. Am I missing something or doing it wrong? If so, I’d be grateful if you could explain further.

        • Sreenivas Doosa

          In your case if company pays 3 times dividend with 4%, the total dividend yield would be 12% in that year (not 4%) which is rare.

          And regarding your savings account, 4% interest per annum (not for month), that means 40/- for 1000/-.

          As per your saving account calculation the interest for year will come to 48% per annum, if that is true. I will just put my all money only in saving account.

        • @sreenivasdoosa:disqus gave a perfect clarification. Have a look.

  • Tejas

    Nice article. Thanks for that.

    One caveat to be kept in mind…Though some stocks may yield more than 4% (savings account interest), there are chances of capital loss as well…..either because of company specific factors or general downtrend in the market…..

    • You’re absolutely right, Tejas. That is why I wrote this thing above – “Only relying on dividend ratios is not the way to get good fundamental stocks. So also add other many ratios like ROE, D/E etc” This will reduce the odds.

  • Sreenivas Doosa

    “The stock price is compensated on ex-dividend in case of Hind Zinc. Just would like to know how it happened. So you mean the company paid dividend to the share holders not from its profits.?

    • Stock exchange automatically reduces the price of securities in spot market which is equal to dividends per share. And sometime company also pays dividends from its past reserves which is higher than its current profit like Oracle finance. I’ve updated the article with your query. Have a look.

      • Sreenivas Doosa

        Thank you Sowmay for clearing my doubt.

  • Sathyanarayana Naidu K V V

    Very well written and easy to understand article. Even though I’m yet to start investing, your articles are a boon to laymen like me. Continue with the good work and keep updating us regularly

  • Sushanth

    Very good article. In the last part you mentioned about tax. Got a question, I am a newbie in stocks and I have been working in corporate companies for sometime, so I pay tax every year but I have no idea about how to include stocks in it or how to declare a loss of stock in tax. I have noticed a section where you have to mention about the stocks. I have no clue about. It would be great if you could show some pointers.

  • Sadanand Howal

    super duper informative article…My question is that what is this ex date? and how to make sure whether company distributing dividend onto next time

    • Ex-dividend date is the record date to determine the real owner of the stock to whom the dividends should be paid. Dividends will automatically deposited into bank account and may be, you’ll also receive an email notification for the same.

  • Great! Sreenivas. Thanks for the value addition to the discussion.

  • Varun

    I was wrong in assuming that banks pay interest every month.
    But banks pay do pay quarterly:

    http://www.thehindu.com/business/credit-interest-rate-on-saving-accounts-every-quarter-rbi-to-banks/article8356496.ece

    What I don’t understand is that when banks say 4% interest rate, is it:

    4% per quarter ?
    or
    4% per annum?

    If its is 4% per annum, the obviously stocks are a better option. But if its per quarter, than putting money in savings bank is the same as investing in a stock with 4% divided yield p.a. isn’t it?

    • It’s per annum but compounded quarterly.

  • Niranjan

    On ex dividend date, shares should be in my dmat account, right? I’m an Intraday trader so if I buy the shares of a particular company on ex dividend date then I won’t get the dividend, right? As shares will be in my dmat account on T+2 day, right?

    • If you’re an intraday trader then you’re not entitled to get the shares in any case. Just follow this simple rule – you need to buy the stock before it turns ex-dividend to be entitled to get dividends.

  • Niranjan

    The case you mentioned about hindustan zinc is always the same with other companies also or is it just sometimes for some companies?

  • It’s same with every company. It’s the rule regulated to curb the volatility due to dividend announcement.

    • Niranjan

      Then Sowmay what is the use of getting dividend if it’s getting compensated by same amt decrease in stock price? Isn’t it no profit/no loss?

      • Yes! There’s no direct benefit from buying dividend stocks but the company which pay dividends are considered as an excellent company because they have much free cash that can be ultimately used for shareholders. They outperform the market in long run.

        Therefore always try to buy stocks after ex-dividend date to reduce the transaction charges.

        • Niranjan

          Okk got it.. Thanks Sowmay!

  • Chirag

    Awesome n vry informative…thanks man…!!?

  • AG

    Good information on dividends.

    However, it’s an oversimplified view that has been presented.

    Growth is the main driver.

    You get capital appreciation due to growth. You get growing dividend stream also only and only when the company is growing and making more and more money. 2% dividend yield is actually bad. Nobody invests for 2% returns. However, dividends from the same company become beautiful when the company has grown 4 times on profitability, stock price also has gone up say 4 times in sync with the growth, and you now effectively get 8% dividend on your original investment even if the company keeps its dividend policy unchanged and dividend yield is still probably at 2% only.

    That’s how some of the old investors earn a lot thru dividends. In fact, some live on dividends. How? They bought high quality shares and held them thru decades. Those companies grew manifolds in that period. Those companies still pay modest 2% dividend yield on their current price but it may be 500% of the original investment made decades ago, simply because those companies probably grew manifolds in the period and so their prices too went up 250 times.

    In short, look for growing and efficient companies run by high quality management. Rest all will follow – be it extraordinary capital appreciation, or be it extraordinary inflow of dividends a few years down the line.

    The only objective of being in stock markets should be to invest in companies that will keep growing well for quite some period. Rest all is noise. Those who invest in such companies emerge as winners on both fronts – they have stocks that are valued many times of the original purchase price, and they also get dividends which are huge compared to the original investment.

    A cash rich company may pay dividends in absence of good earnings at times. However, soon those reserves will be gone. And with that dividend payouts too will stop or reduce.

    A stable company may pay 4-5% dividends even. But then if it is not growing at all then it can’t pay more dividends. Also very likely it’s stock price also won’t appreciate. And you will keep getting 4-5% dividend on your original investment a few years later also, which you may not like anymore.

    It is said that real investing is for dividends only. It’s true. However, great dividends come only after a few years or decades of great growth. Dividends are the outcome. Price appreciation too is the outcome. Growth is the driver.

    So how to find companies that will grow well for an extended period? Well, the whole market is trying to find that only. You also find :)! Happy Investing!!

  • santosh

    there r 5 columns in moneycontrol about diviend whichone to follow?

  • Nikhil Ganotra

    That’s a a great article, Sowmay!

    I really appreciate your efforts. I think dividend paying stocks should be chosen if we are looking to hold them for long term. Because if we are looking for short term investments, their value will go down on the ex-dividend date and we won’t be having much capital appreciation benefits.

    What do you say about that/

  • bedar hasan khan

    really good information buddy

  • Rocky

    Valuable info. Keep it up. Thank you

  • A.K.Bishwas

    I am retiring shortly.Am imterested to
    know in which shares i should park my money to get max regular dividend income with fair safety of my corpus. I can invest up to 25 l in stock

  • Dr Ravinder Singh Mann

    Very Informative Article. Keep it on.

  • Dinesh Gohil

    Sowmay, great article!
    I am retired person and would like you to suggest few stocks offering growth and good returns .Dinesh

  • Rocky

    I partly disagree with your below statement in the article:
    “Above 2 sources are one-time use only. In other words, it will be cumbersome to check moneycontrol or run a query on screener again and again, to see whether there is any new dividend paying stocks in the list.

    So what if you keep someone to work for you. A notifier.”

    I would like to add that one can create Alert for your customized screen (at Screener.in) and regular alert of new addition will be notified in your registered email.
    I am using above facility since last two months.
    I hope this information could be of some help for the readers.
    Thank you.

    • Maybe this feature was not added at the time I wrote this article OR maybe it’s my ignorance. Anyway, thanks for pointing it out.

      • Rocky

        Let me thank you for suggesting formula for Intrinsic value of a stock based on its EPS(TTM). I could build up custom ratio at Screener.in using formula you suggested in one of your Quora post. Now i have customized columns with my customised ratio which are shown for each and every screen that i open.

        Thank you Sowmay for your valuable inputs.

  • Rajiv chandra

    Not understood the example of ” hindusthan zinc” that is ” the flaw of dividend” plz elaborate,after announcing INR 24 dividend the stock price gone down 24 points down how it happens? Recently BPCL declared INR 23.5 PER SHARE dividend on Feb 28 ,2017 ,is same thing happened with this stock. I want to know. My email id is – rajibchandra2508@gmail.com

    • Yes, whenever cash goes out of company (that is dividend) or something similar happens (like buy-back), the actual prices are proportionately adjusted. The reason behind this is to avoid the volatility due to dividend distribution.

  • Hari Kishan Singh

    The Best article I ever seen……
    Keep it up
    and Thanks for a lot of knowledge about dividend
    Actually I want to know about dividend since 3 months but no one clarify me the same, but in your article everything is crystal clear

    Heads of to you…..

  • It’s 1390%. Multiply it from face values.

  • The person who holds the shares at the time of record date set by the company is entitled to receive dividends.

  • Gaurish Vaglo

    If Dividend Payout is the % of net profit being paid as dividend i.e % of EPS , how can DP be more than 100%? Some examples you have shown have more than 100% DP

    • It can be more than 100% if the Dividend is paid out of previous year’s profit.

  • Shahbaz

    Great article….. thanks

  • I hope article has explained it well.