If you like dividends you should love these 3 stocks

Historically, dividend-paying stocks have outperformed their non-dividend counterparts over the long haul. (Image: Pixabay)
Historically, dividend-paying stocks have outperformed their non-dividend counterparts over the long haul. (Image: Pixabay)

Summary

  • If you like receiving income from dividends, here are three stocks to consider.

Trading and investing, particularly with a long-term perspective, presents considerable challenges for many retail investors. The landscape of investment is ever-evolving, posing unique hurdles along the way.

Despite these obstacles, 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 has been no retreat. Investment continues to flow, whether directly or through mutual funds, underscoring a resilient commitment to the market.

A key factor in this enduring stability is often overlooked: the role of dividends. Dividend-paying stocks have lent a remarkable steadiness to portfolios amidst the market's ups and downs in 2022 and 2023. This stability has not only attracted more investment into the market but has 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 incentivize companies to boost their earnings to maintain or increase their dividend payouts, attracting more investors and potentially driving up share prices.

Historically, dividend-paying stocks have outperformed their non-dividend counterparts over the long haul, a sentiment echoed by Benjamin Graham, the father of value investing. Graham emphasized the importance of focusing on dividend returns and company performance over market fluctuations.

If you like receiving dividends, these are the top 3 stocks that you should have on your watchlist.

#1 ITC

ITC is a diversified conglomerate with businesses spanning fast moving consumer goods, hotels, paperboards and packaging, agri-business, and IT.

The company is the country's leading FMCG firm and the market leader in the Indian paperboard and packaging industry.

In the agri sector, it's acknowledged globally as a pioneer in farmer empowerment through its wide-reaching agri business. In the hotels segment, it's a pre-eminent hotel chain in India.

For years, ITC was planning to gradually shift towards an asset-light model in the hospitality sector for further expansion. Now these words have been put to action with the hotel business demerger plan.

Over the last decade, ITC has successfully created an array of strong brands which are either #1 or #2. They are market leaders in their respective categories.

ITC has always been considered as 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 has said that dividend payouts will be stepped up to about 80-85% of its post-tax profits.

In financial year 2022-23, ITC paid out 15.5 per share as dividends. ITC has been paying dividends since 1994 without missing a single year in between.

ITC's dividend payout ratio in financial year 2022-23 was almost 100%. The company has come a long way in increasing 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 Airforce, Indian Army, ISRO, Indian Navy, and Indian Coast Guard, among others.

Defence stocks in India have garnered significant interest for quite some time now. In a groundbreaking milestone, the Indian defence sector scaled new heights, surpassing a significant milestone of 1 trillion in the total value of defence production.

The company was at the forefront, taking on as many orders as it could which resulted in a substantial spike in revenue.

It has also set up a 2.1 bn Integrated Cryogenic Engine Manufacturing Facility (ICMF) that would cater to the entire rocket engine production under one roof for ISRO. This will eventually result in higher profits for the company.

HAL also completed a stock 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.

#3 Dr Reddy's Laboratories

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 overseas.

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, partly offset by price erosion.

Its total net profit more than doubled and grew by 107% on a YoY basis to 45.1 bn. The increase was driven by new product sales with higher gross margins, higher government incentives, and favourable foreign exchange.

It launched 10 new products during the quarter and 94 new products during the year across various countries of emerging markets.

The company closed the financial year with double-digit top-line and bottom-line growth, with earnings before interest, tax, depreciation, amortisation (EBITDA) and return on capital earnings (ROCE) margin exceeding the 25% levels.

Dr Reddy's diversified global presence, capability, 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're can help offset inflation and even provide an income during retirement. These stocks are also considered to be a good buffer for one’s portfolio during times of market volatility.

Dividend stocks weren’t very popular up to 2021 but lured by the prospect of steady income during a period of high inflation, these stocks have regained their popularity.

Companies paying out a slice of their earnings to shareholders typically have a record of strong profits. This gives an incentive to the company to maintain the dividend payments in the future.

Dividend stocks also have the potential for value appreciation. They can thus bring a dual benefit 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 high dividend yield stocks and dividend growth stocks in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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