Despite these hurdles, Indian retail investors have navigated the terrain with confidence since the market downturn in 2020. The market’s journey to new all-time highs has been a significant morale booster. Moreover, even during market corrections, there was no pullback. Investment continues to flow, either directly or through mutual funds, underscoring a resilient commitment to the market.
A key factor in this continued stability is often overlooked: the role of dividends. Dividend-paying stocks lent remarkable stability to portfolios amid the market ups and downs in 2022 and 2023. This stability not only attracted more investment into the market but also highlighted the critical role of dividends in navigating volatility.
In times of high inflation, dividends have been a reliable source of steady income and moderate investment returns. They also encourage companies to increase their earnings in order to maintain or increase their dividend payouts, attracting more investors and potentially raising stock prices.
Historically, dividend-paying stocks have outperformed their non-dividend counterparts over the long term, a sentiment echoed by Benjamin Graham, the father of value investing. Graham stressed the importance of focusing on dividend yield and company performance over market fluctuations.
If you like receiving dividends, these are the top 3 stocks you should have on your watch list.
number 1 ITC
ITC is a diversified conglomerate with businesses spanning fast moving consumer goods, hotels, cartons and packaging, agribusiness and IT.
The company is the country’s leading FMCG company and the market leader in the Indian carton and packaging industry.
In the agricultural sector, it is globally recognized as a pioneer in farmer empowerment through its extensive agribusiness. In the hotel segment, it is a prominent hotel chain in India.
For years, ITC has planned to gradually shift to an asset-light model in the hospitality sector for further expansion. Now these words have been implemented with the hotel business separation plan.
Over the last decade, ITC has successfully created a set of strong brands that are either #1 or #2. They are market leaders in their respective categories.
ITC has always been considered to be an attractive dividend play. Right from humble beginnings in 1994, the company has rewarded investors with a higher payout compared to its peers.
This is the one thing that makes ITC stand out. Over the years, the company’s management has laid out a flexible capital allocation policy. It said dividend payments will be increased to around 80-85% of its after-tax profits.
In the financial year 2022-23, ITC paid ₹15.5 per share as dividends. ITC has been paying dividends since 1994 without missing a single year in between.
The dividend payout ratio of ITC in the financial year 2022-23 was almost 100%. The company has come a long way to increase its payout. Between 2003 and 2009, the company had a modest payout ratio ranging between 30-40%.
The company’s 5-year average dividend payout ratio is 84.8% and its current dividend yield is 3.3%.
In January 2024 the company paid an interim dividend of ₹6.75 per share.
#2 Hindustan Aeronautics
Hindustan Aeronautics manufactures and maintains aircraft and helicopters for the Indian Air Force, Indian Army, ISRO, Indian Navy, and Indian Coast Guard, among others.
Defense stocks in India have garnered significant interest for quite some time now. In a groundbreaking milestone, the Indian defense sector scaled new heights, surpassing a significant milestone of ₹1 trillion in the total value of defense production.
The company was at the forefront, accepting as many orders as it could, which resulted in a large increase in revenue.
It also established a ₹2.1 bn Integrated Cryogenic Engine Manufacturing Facility (ICMF) which would cater for all rocket engine production under one roof for ISRO. This will eventually result in higher profits for the company.
HAL also completed a share split in September 2023 where it issued shares in the ratio of 1:2.
Since 2008, the company has declared regular dividends. In the financial year 2023, the company declared a final dividend of ₹55 per share, with a dividend payout ratio of 31.5%.
The five-year average dividend payout ratio stands at 33.8%. The current dividend yield is 1.4%.
In February 2024 the company paid an interim dividend of ₹22 per share.
number 3 Laboratories of Dr Reddy
Dr Reddy’s Laboratories is an Indian multinational pharmaceutical company based in Hyderabad. It manufactures and markets a wide range of pharmaceuticals in India and abroad.
The financial year 2023 was one of the best years for Dr Reddy’s Laboratories. The company’s revenue came in at ₹245.9 billion (bn) and grew by 15% on a YoY basis. The growth was mainly driven by new product launches, partially offset by price erosion.
Its total net profit more than doubled and grew by 107% on a YoY basis to ₹45.1 billion. The increase was driven by new product sales with higher gross margins, higher government incentives and a favorable currency.
It launched 10 new products during the quarter and 94 new products during the year across various emerging market countries.
The company closed the financial year with double-digit top-line and bottom-line growth, with earnings before interest, tax, depreciation, amortization (EBITDA) and return on capital gain (ROCE) margin exceeding the 25% levels.
Dr. Reddy’s diversified global presence, capacity and strong balance sheet make it a partner of choice for various business partners.
In the financial year 2023, the company declared a final dividend of ₹40 per share, with a dividend payout ratio of 14.7%.
The final dividend for 2024 should be announced at the time of the annual results.
The five-year average dividend payout ratio stands at 19.3%. The current dividend yield is 0.7%.
Conclusion
Dividends are the lifeblood of many investors. They can help offset inflation and even provide income during retirement. These stocks are also considered a good buffer for one’s portfolio during times of market volatility.
Dividend stocks were not very popular until 2021 but lured by the prospect of stable income during a period of high inflation, these stocks regained their popularity.
Companies paying a cut of their earnings to shareholders usually have a track record of strong profits. This gives the company an incentive to maintain the dividend payments in the future.
Dividend stocks also have the potential for value appreciation. They can thus bring double profit in the long run. This provides an additional way to beat inflation. Not only does the stock provide income during inflation, but the stock price appreciation can also help offset inflation.
If you want to dig deeper into dividend investing, use Equitymaster’s powerful stock screener to check out high dividend and dividend growth stocks in India.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com