ValuePickr Forum

Dividend Yield Portfolio - for Wife

Hi,
I am planning to create a low maintenance - High dividend yield portfolio for wife. Growth investing for wife is being taken care mostly using smallcap and midcap funds.

The purpose of this portfolio is to receive Regular Dividends and will never sell these stocks (thanks to LTCG - now no more switching , unless company story changes). My assumption is: as the companies grow, dividends would also grow. As per my study, if you had to invest in Indiabulls HF (good dividend paying stock) in 2011, by now in 2018, dividend yield would have been 20% (Price of 2011 / current dividend). This could be a good bills paying strategy for retirement.

I have decided to stick to only private companies. Government companies, many of them are paying excellent dividends (Coal India, REC, PFC, HindZinc, etc) However Govt may stop paying dividends anytime, or if the government changes, new govt may pay lesser dividends.

Filters:

  1. Private Companies
  2. Dividend Yield > 2%
  3. Net profit > 100 Cr
  4. Non-Cyclical
  5. Consistent Dividend Paying
  6. Rising Profit
  7. Debt/Equity < 1
  8. Average to Low Valuations
  9. FCF > 0
  10. Diversified Portfolio

Stock and Approx Dividend Yield (Equal weighted Portfolio):
OFSS 4.54%
CASTROLIND 5.61%
HCLTECH 2.48%
INDIGO 2.64%
INFY 2.27%
HEROMOTOCO 2.40%
IBULHSGFIN 2.18%
CARERATING 2.31%
ITC 1.86%
BAJAJ-AUTO 2.00%

Sector wise distribution:
Software: OFSS, HCLTECH, INFY
Housing Finance: IBULHSGFIN
Airline: INDIGO
Auto: HEROMOTOCO
Rating Agency: CARERATING
FMCG: ITC
Oil: CASTROLIND

In advice or suggestions, would be useful. Thanks :slight_smile:

Disc:

  1. Invested in IBULHSGFIN in my growth portfolio.
  2. I am not a SEBI registered advisor and this is not an investment advice.
8 Likes

Yu may like to Look at VST industries. One of the core stocks of RK damani

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Good list. Mold tek packaging gives good dividends too I think. It is a small cap and has client concentration but the business is solid.

OFSS maybe special one time dividend case to reduce the huge cash hoard. Castrol maybe un-adjusted for bonus but yield still remains high. Just check sustainability factor.

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Along with this list, I would like to give chance to REC, PFC, SJVNL like PSU companies which are giving regular dividend to their share holders.

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I like this idea. Apart from business thesis, few of my investments r based on this thesis too but with a combination of growth. So only one suggestion. Try to find few companies with lower equity base, cashflow good enough to manage growth, market size opportunity high, honest promoters who won’t dilute equity without reason n will return back money. They might give you growth with reasonable dividend right now which will keep growing . I don’t want to exemplify it with indiabulls because of personal reservations but intent n outcome is similar .

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BSE fits the description quiet well in my opinion.
Disclosure - Invested in BSE

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Oracle has been paying dividend only for last few years so I guess you should check how worthy it is for this portfolio. I am doing a similar portfolio , ITC is the one that I have been adding, also I guess this is a SIP investment if yes then buying is in slow mode so its always better to have stocks whos price isnt going too fast high or down.
Bajaj/Hero honda is a good SIP its a cyclical business tho, but has given handsome 20% returns over 10 years plus so if you do SIP chances of loosing is very limited. Dividend yield is 2%

Balmer Lawrie has a high dividend, but I am not sure of this as growth is missing in it, but has a history of paying dividends without issues for last 10 years

You may also look at Greaves Cotton.
The current dividend yield is 5%. This is a debt free company posting ~20% ROE and available at 15 PE. Company has hired many people at top from prestigious organisations recently.

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Greaves will be hit hard by rapid transition to E rickshaws

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Thanks for letting me know about it.

Makes total sense. Thanks for sharing your inputs.

Isn’t it already priced in and management is already planning to take on the challenges?

May be not. If there is rapid de-growth negative operating leverage will make profits evaporate.

They are too late in the game. E rickshaws are already on roads.

I don’t think very highly of management’s ability to manage technological transition.

Let us not forget that they are pre-independence company. They remain a low end engine manufacturer with <3k crore mcap. Nothing to write home about.

1 Like

Very nice choice. my recommendation will be TCS though i see you have already have three in software related companies… You may need to re-balance them :slight_smile:

Incase you are fine with PSU may be ONGC , NTPC , Powergrid can be looked upon.

If its ok, I would like to question the rationale of such an approach. What specific benefit is envisaged from a dividend yield fund? Regular income can be also provided by selling stocks from a regular portfolio. NSE has a dividend opportunities index - it would be wise to compare its returns with that of Nifty 50 and then to decide on such an approach. Remember that dividend distribution is also taxed so in a way you are paying the tax anyways.

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Investing in psu for dividend shouldnt be a right choice…you may lose your capital…and least share price apperication
how much return did ntpc,rec and ongc gave in 5 yrs…hardly any

Dividends should not be the sole criteria for building a portfolio or selecting stocks. You can convert any stock into a high-dividend stock or convert any portfolio info a high income portfolio simply by selling a part of your position every year (or as often as you need) without having any net negative effect on your total net worth (value of stocks + cash) compared to a high-dividend portfolio. Here is how it works.

Stock price drops by amount of dividend on the ex-dividend date. Lets assume a high-dividend yield stock is trading at 100 rs on the last cum-dividend date and dividend per share is Rs 5. On ex-dividend date stock is suppose to open at 95 (assuming there is no other event that is causing the stock price to go up or down). Similarly, a low-dividend stock is also selling at 100 on last cum-dividend date and dividend per share is rs 1. This stock will open at 99 on ex-dividend date (again assuming there is no other event that is causing the stock price to go up or down).

On the ex-dividend date, your total net worth will be same rs 100 for both stocks (high-dividend yield stock will be worth 95 + 5 rs cash, low-dividend yield will be worth 99 + 1 rs cash). If you want a high dividend from the low-dividend stock, you can sell 4 rs worth of shares on the ex-dividend date (or any other date for that matter) and it will not have any impact on your net worth compared to when you buy a high dividend stock.

There is a common myth among investors that when stock price drops on ex-dividend date, it magically goes up sooner or later to whatever it was on the last cum-dividend date. That is not true. There is no reason why stock price should go up just because it dropped due to dividend payment. Stock price will up (or down) for all the normal reasons but dividend is not one of them, and it would have gone up (or down) irrespective of whether the company paid a dividend or not.

Practically, stock price tend to go up as the ex-dividend date approach, as investors buy the stock in anticipation of the dividend or in anticipation of the price rise before the dividend payment.Such stocks drop by a lot more than the dividend amount (sometimes even more than the earlier gains) after the ex-dividend date so there is no real benefit if you plan on holding the stock for long term.

Companies that have the ability to generate high return on capital and have the opportunity to do so, should really not pay high dividends. In fact, companies that do not have an opportunity to deploy profits at high rates, return the capital to shareholders in the form on dividends and buybacks. Such companies will not grow over long term. So high dividend payment is a signal from management that they do not see many opportunities to deploy the profits they are generating.

I would rather invest in companies that pay low dividends and have ability and opportunity to reinvest capital at high rates and if I want to generate high dividend from such position, I will sell a small fraction of my position regularly. If you do not want to decide when to sell, you can sell it on the ex-dividend date because it will have the exact same effect on your net worth had the company itself had paid a high dividend.

Essentially, this is converting part of capital gains into dividends. Govt will always to try to tax all sources of regular incomes at high rate and dividend is one of them. It will tax capital gains at a lower rate as investors take risk to earn it. So a high dividend portfolio is actually not tax efficient.

The only real benefit of companies that pay high dividend is that investors don’t have to do anything to get cash in their banks. Psychologically, selling a part of the portfolio to generate income is painful. It feels like you are consuming capital rather than income. Some friends have even told me that if you keep selling part of your shares regularly, there will be a point where shares will drop to 0 while if you spend only the dividends, then number of shares will remain unchanged. This is not true. Number of shares don’t matter,value of shares matters. When companies retain profits and have the ability to reinvest those profits at high return on capital, market will send the stock price higher, so even if you sell some shares regularly, total value of your position will still be higher than if the company had paid high dividends. As the price goes up, you will have to sell fewer and fewer shares to generate same amount of income. Moreover, if the company does well and its price goes up, there will always be bonus and splits so absolute share count will rise.

The real use of dividends is to judge quality of management and quality of earnings. When companies pay high dividends, its an assurance that company is actually earning the profits it says it is earning. High payout also mean that management is not hoarding cash (and likely to spend it unwisely in future) and is willing to share it with minority shareholders.

39 Likes

But will not dividend stocks have a benefit in bear market/recessions?
Suppose, I have a cash requirement which can be met from dividends or from selling shares.
After dividends, I will still have the same ownership in the company. If I wish I could sell these shares at a more opportune time when the PEs are high.

But by selling shares to get the same amount, I would be losing ownership in the company. I would be forced to sell the shares at a price way less than its worth.
Stock price fluctuates based on a variety of factors apart from earnings. In a bear market, P/E would be unusually low. To generate the same amount of cash, one would have to sell more shares in a bear market, than one would want to.

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Dear Sir,

If I follow above method, then in these cases I will incur STT + brokerage charges + DP charges (Rs. 15.89 every instance I sell part shares) + GST. Also the income generated will be taxable as per STCG or LTCG and applicable tax bracket. Please do suggest some other benefits I might get from following the above procedure. Your advice will be really helpful…

with regards,