Investing in stocks has been far more rewarding than other asset classes in India over the past four decades as we saw earlier. We also observed that it is possible to beat the market indices over time by adopting specific investment strategies, such as equally weighted indices. Investing in best dividend paying stocks is yet another proven way to outperform the market over long term. In this article we outline findings of three well-known researches for this strategy, and then, list out our own selection of 10 best dividend paying stocks in the Indian market.
Research findings on high dividend yield strategy
Let’s begin by summarizing these researches. They are as follows:
1. Dogs of the Dow.
This strategy popularized by Michael B. O’Higgins in 1991, proposes to invest equally in ten DIJA constituent stocks with highest dividend yield, and rebalance annually. Proponents of this strategy argue that blue-chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle. This should mean that companies with a high yield, with a high dividend relative to stock price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low-yield companies. From 2000 – date, this strategy has performed well, outperforming DIJA & S&500
2. David Dreman’s Contrarian Strategies
David Dreman in his investment classic, Contrarian Investment Strategies explored this strategy in detail. Dreman took 1500 largest companies from Compustat database and studied them for a period of 27 years beginning January 1 1970, through 31 December 1996. Companies were sorted into 5 equal groups based on dividend yields and rebalanced quarterly. Annual returns are as shown below. The highest yielding stocks outperformed the market by 1.2%, and stocks with low or no yield by 4%. Analysis of the composition of returns showed that almost half of the annual returns of the highest yielding group came from the yield itself. Further, annual price appreciation of the highest yielding group was lower than any of the other worse groupings. In summary, results indicated, buying stocks with high dividend yield beats the market, although the price appreciation may be lower, and the total returns may be lesser compared to other contrarian strategies such as – Low P/E, P/CF and P/BV.
|Annual returns (%)||Low||2||3||4||High||Market|
3. James P O’Shaughnessy’s findings
James P O’Shaughnessy in What Works on Wall Street, elaborately described the impact of dividend yields on stock returns. His findings are broadly in-line with other studies, although his results indicated that the effects of high dividend yield on returns were more pronounced for large cap stocks. Using data from S&P Compustat database spanning over a period of 52 years beginning December 1951 through December 2003, he observed that cumulative returns of 50 High Yield Large Stocks (stocks with market cap > average, or mostly top 15% stocks) over the period, exceeded the Large Stocks universe in general by more than double (~143%), while returns of high yield All Stocks (stocks with mcap > 185M) were marginally better than All Stocks universe in general (cumulative ~ 18%).
These results are not entirely without criticism. Many of these studies uses equally weighted portfolios, balanced periodically (annually or quarterly). Equally weighted portfolios perform better than their price weighted counterparts as we saw in one of the previous articles. As such, it has been argued by some that the superior performance of Dogs of the Dow strategy in particular, is at least in part due to the equal weightage of the constituents, as DIJA is a price weighted index.
With this data in context, we attempt to develop a portfolio of high dividend yield stocks from the Indian market.
10 best dividend paying stocks in India
Methodology adopted is as follows. We ran 2 separate screens using 2 different softwares and picked the common stocks from the top 25 results. The screens are as follows:
Screen -1, Tool -1
Dividend yield > 3.5
Screen – 2, Tool -2
Dividend yield > 3.5 AND Average 5years dividend/Market Capitalization > 0.016 AND Dividend last year > Average 5years dividend AND Profit after tax > Net Profit last year * .8 AND Dividend last year > .35 AND (Profit growth 3Years > 10 OR Profit growth 5Years > 10 OR Profit growth 7Years > 10)
Two separate screens were used to ensure data and IT issues are avoided. Additionally, intersection of the data from two result sets ensured that we not only pick the highest dividend yield stocks, but also ensure:
1. Company has been consistently paying high dividend historically
2. Company has been growing continuously
3. Growth is not slowing down, and TTM growth is 25% or more higher than last fiscal
The results are as follows:
10 best dividend paying stocks in India
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Disclaimer: This article is for information purpose only and does not constitute financial advice, OR recommendation to buy or sell any stocks. Author may have vested interests. Refer to T&C and full disclaimer.
In summary, building a portfolio of equally weighted high dividend stocks, balanced periodically (quarterly or annually), generally beats the market, although, the margin of outperformance can be low compared to other contrarian investment strategies. One can use this strategy if seeking for regular income, otherwise, it might not be entirely unreasonable to explore alternative more rewarding strategies.