Dividend-paying companies offer a safer bet with capital gains uncertain – News Air Insight

ET Intelligence Group: Amid rising uncertainty of capital gains on equities in a volatile market, dividend-paying stocks are back in the limelight. Select companies, especially those with a mature business model and, therefore, having steady cash flows tend to pay dividends regularly in a bid to return the excess cash generated from the operations to shareholders. However, merely considering the absolute dividend payout per share will not reveal whether a stock looks attractive at its current price. For that, dividend yield comes in handy. It is calculated as the annual dividend per share divided by the stock price. The ratio makes it easier to compare stocks across sectors to arrive at an investment decision.

ETIG has identified 10 stocks offering dividend yields of 4% or more based on FY25 payouts: Vedanta (6.3% yield), Coal India (5.7%), REC (5.4%), Hindustan Zinc (5.3%), GAIL (5.1%), ITC (4.8%), ONGC (4.6%), RITES (4.5%), NMDC (4.2%), and Oracle Financial Services Software (4.1%).

A caveat for investors looking at dividend yields – the current yields are based on the past year’s dividend payouts. While companies do strive to maintain a stable dividend payout relative to net profit on a longer horizon, fluctuations due to government policies, economic and geopolitical uncertainties cannot be ruled out especially when such aberrations tend to affect profitability. For instance, ITC’s stock currently trades near the 52-week low amid a sharp rise in tobacco excise duties since February 1, which has affected investor sentiment. While the company continued to declare an interim dividend of ₹6.5 on January 29, same as in the previous year, future payout will depend upon how well it can protect profitability amid a higher excise duty regime.

In addition, effective yields will vary depending on investors’ marginal tax rates, as dividends are taxed in shareholders’ hands. For instance, a taxpayer facing a marginal tax rate of 30% and 4% educational cess will receive an effective dividend yield which will be over two-third of the calculated yield. For such a taxpayer, Vedanta’s effective dividend yield will be around 4.3%.

Also, the list does not include companies such as TCS, HCL Technologies, and UTI AMC, where yields are high due to special dividends. To be sure, companies operating in the sectors with high cash generation such as the IT sector tend to distribute special dividends more often than others.