Welcome to the world of Dividend Aristocrats

One thing that could work in favour of the dividend yield story is that the private sector and public sector have a strong reason to pay out liberal dividends this year.

Mar 26, 2020 02:03 IST India Infoline News Service

How to buy a stock that gives you relative comfort in the midst of a volatile market wracked by the Coronavirus? One approach could be to look at the dividend yields. Normally, a correction in the market tends to make stocks attractive from a dividend yield perspective. While prices come down, there is a possibility that the business slowdown could impact the profits and the dividend payouts. But, one thing that could work in favour of the dividend yield story is that the private sector and public sector have a strong reason to pay out liberal dividends this year. PSUs need to help bridge the government budget shortfall and the private sector promoters get to pay taxes 10% lesser before the end of March 2020.

How to go about picking the Dividend Aristocrats
There are some inherent risks in the Dividend Aristocrat model. Firstly, the price may have fallen due to structural problems in the companies. So we exclude any company where there has been any reported default in loans in the recent past. Secondly, the dividend yield story is skewed in favour of low price stocks. Hence we also avoid stocks that are priced at less than Rs.20. We also avoid any company with a dividend yield of more than 25%. Lastly, dividend yield may get distorted by special dividends. So, we only consider dividends that have followed a trend at least in the last 2 years. This should help us to substantially filter out the outliers in the Dividend Aristocrat list. Now we shall create two separate lists of dividend aristocrats; one for PSUs and one for private sector companies.

Zeroing down to the Dividend Aristocrat list of stocks
The following table comprises top Dividend aristocratic picks with 10 PSU companies and 10 in the private sector space.
DIVIDEND ARISTROCRATS – PRIVATE SECTOR
Stock Name CMP (20th Mar 2020) Dividend Yield (%)
Vedanta Ltd. Rs75.45 24.97%
Hindustan Zinc Ltd. Rs136.25 14.68%
HEG Ltd. Rs555.00 14.41%
Polyplex Corporation Ltd. Rs366.00 13.93%
MPS Ltd. Rs191.00 13.08%
UCAL Fuel Rs72.20 12.47%
DB Corp Rs83.60 11.96%
Banco Products Rs68.50 11.68%
Bajaj Consumer Ltd. Rs138.25 10.13%
Bharti Infratel Ltd. Rs148.15 10.12%
DIVIDEND ARISTROCRATS – PUBLIC SECTOR
Stock Name CMP (20th Mar 2020) Dividend Yield (%)
NALCO Ltd. Rs32.25 17.83%
Balmer Lawrie Rs79.70 13.80%
OIL India Ltd. Rs81.55 12.57%
REC Ltd. Rs91.65 12.00%
PTC India Ltd. Rs36.20 11.05%
SJVN Ltd. Rs20.45 10.51%
Indian Oil Corporation Ltd. Rs90.60 10.21%
NLC India Ltd. Rs45.95 9.86%
Coal India Ltd. Rs132.80 9.85%
ONGC Ltd. Rs72.35 9.68%
Data Source: NSE

What are the pros and cons of this Dividend Aristocrat Approach?
One thing is evident that even after applying a number of filters, you are still able to get a large number of stocks that meet the dividend yield criteria. Here is what works in favour of this approach.
  • Prices of quality stocks are also down sharply and that makes a clear case for the dividend yield approach to be adopted
  • With most private and PSU companies likely to keep dividends elevated ahead of the March 31st deadline for scrapping of DDT, dividend levels will not be an issue
  • Even in terms of price performance, high levels of dividend yield have traditionally given a good degree of price comfort. Hence price damage may be limited from here on
But there are some downside risks to adopting the Dividend Aristocrat approach.
  • Quite often, the value offered by dividends is negated by the price fall. Stock markets give more weightage to plough back of profits at high ROE than dividend payouts
  • There has been a correlation between low growth visibility and high dividend yields. That has normally worked against the Dividend Aristocrat approach
  • Sustaining dividends can be tough in uncertain times as we are seeing today. Any disappointment in dividend payouts can result in price damage.
What really works is the sharp correction in the last 2 months and the compulsion for most private and PSU companies to declare generous dividends this year.

Is the market becoming a Dividend Aristocrat
While stock specific dividend yields can be misleading at times, the Nifty dividend yields rarely gives the wrong picture. Check the chart below.
Data Source: NSE

What makes the Nifty Index a Dividend Aristocrat is that the dividend yield of the Nifty at 1.84 was last seen in the peak of the Lehman Crisis between October 2008 and March 2009? This was the period when the markets consolidated before the massive liquidity driven bull rally. That is an important take away from the dividend yield story. Dividend yields of specific stocks can be wrong but the yield of the market as a whole is rarely wrong. The market has given its signal. Now it is for the investors to take a call!

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