Investing in strong dividend-paying stocks can create a reliable income stream while fostering long-term wealth. Here’s how to make informed choices:
1. Look for a healthy dividend yield
A sustainable yield of 4-5% is a good benchmark. Avoid stocks with abnormally high yields as these may signal financial distress rather than genuine strength.
2. Prioritize consistency
Reliable dividend-paying companies have a track record of stable or growing payouts. Public sector undertakings like Coal India Ltd and NTPC Ltd stand out for their consistency even during economic downturns.
3. Evaluate financial health
A company’s ability to maintain dividends depends on solid financials. Favour businesses with steady profits, healthy cash flows, and low debt to ensure continued shareholder rewards.
4. Favour defensive sectors
Sectors like fast-moving consumer goods (FMCG), utilities, and energy remain resilient in volatile markets. These industries house many companies with strong, predictable dividend policies.
5. Examine the payout ratio
An ideal payout ratio falls between 40-60%, balancing shareholder rewards and reinvestment. A very high ratio might be unsustainable if earnings drop.
6. Leverage the PSU advantage
Government-owned enterprises are often required to distribute a portion of their profits. Stocks such as Power Grid Corporation Ltd and Bharat Electronics Ltd offer steady and attractive yields.
Applying these principles is critical to building a dividend-focused portfolio that can provide passive income and ensure long-term capital growth.
Best stocks to buy
Here are some stocks that are attractive from a dividend perspective in the current beaten-down market, based on the stocks’ fundamentals and potential for recovery.
Coal India
Coal India stands out as a dividend powerhouse, making it a compelling choice for income-focused investors. With a robust dividend yield of approximately 6.95%, the company consistently rewards shareholders with attractive payouts.
Over the past year, Coal India has declared dividends amounting to ₹26.35 per share, showcasing its commitment to returning value to investors. This consistency is further supported by the company’s strong financial health. Coal India maintains a low debt-to-equity ratio of 8.1%, ensuring financial stability and an ability to sustain dividend payouts even during challenging market conditions.
Operating in the energy sector, Coal India benefits from the defensive nature of its industry, as energy demand remains steady regardless of economic fluctuations. The company’s government backing as a public sector undertaking (PSU) adds another layer of reliability, with mandates to distribute a significant portion of profits as dividends. Besides, Coal India’s payout ratio, which has historically been above 90%, reflects its focus on rewarding shareholders while maintaining operational efficiency.
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After declining by 40% from its August highs, Coal India’s share price seemed to have plateaued in recent months. But the hesitation seems to be slowly giving away and the green shoots that have emerged at an important value area region around 360 has triggered a revival.
The strong move seen recently has gone beyond the trendline resistance, indicating that it can continue. Also, the Moving Average Convergence Divergence (MACD) has crossed the signal to the way up, highlighting that the trends are showing signs of some downside exhaustion. A rally from here can help the prices rise to important value area region around 450 in the next 6 months.
Gujarat Pipavav Port Ltd
GPPL offers an attractive proposition for dividend-seeking investors by meeting key benchmarks on stability and financial health. The port company has consistently provided healthy dividend yields, maintaining a sustainable range of 4-5% in recent years. Backed by APM Terminals, GPPL has demonstrated consistent payouts, which are supported by robust operational performance and strategic location advantages.
In FY23, the company reported handling over 750,000 (20-foot equivalent units) and recorded steady profits, showcasing its resilience and efficiency. This aligns well with the principle of evaluating financial health, as GPPL has low debt levels and strong cash flows, ensuring its ability to maintain shareholder rewards.
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GPPL has been facing some strong headwinds recently and the steady exits that were witnessed in the last few months have brought its share price to some important support zones. Also, based on the price action we observe that the prices have tried to stabilise over the last few weeks hinting at a possible receding of the selling.
As the Relative Strength Index (RSI) is now attempting some revival from ‘Oversold’ zones, we need to combine it with the price action that unfolds in the coming week. With previous lows and candle formation hinting at a rebound, one can consider an upward rise to 180 levels in the next 3 months.
Vedanta Ltd
VEDL, a prominent player in India’s natural resources sector, is an appealing choice for dividend-focused investors due to its consistent performance and strong financials. Known for delivering substantial shareholder value, VEDL has maintained an attractive dividend yield, often exceeding 4-5%.
In FY24, the company announced a total dividend payout of about ₹37.5 per share, showcasing its commitment to rewarding shareholders. With a diverse portfolio spanning zinc, aluminum, copper, oil, and gas, VEDL operates in resilient sectors, akin to defensive industries.
VEDL’s financial health remains robust, supported by steady profits and strong cash flows from its core businesses. In FY23, the company reported consolidated revenue of ₹1.47 trillion, reflecting its operational efficiency and market leadership. Its payout ratio aligns with the ideal 40-60% range, ensuring a balance between rewarding shareholders and reinvesting in growth opportunities. Furthermore, VEDL’s focus on sustainability and cost-optimization strengthens its long-term value proposition.
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As India’s stock market continues to face a daunting task for recovery, this counter from the metal sector shows continued promise. As we can look at the range this stock has gone through, we can observe that bullish interest is quite strong in this counter. The dips into the ascending trendline support region around 400 has managed to hold back the bearish bias and reinstate the bullish momentum.
The recent rebound in the Relative Strength Index (RSI) is seen crossing the ‘neutral’ zone and could be a signal of a new move unfolding. Looking at the favourable developments and steady long body positive candles on higher timeframes, one can expect more upside bounds to retest VEDL’s previous highs of 520 within the next 3 months.
Raja Venkatraman is co-founder, NeoTrader. His Sebi-registered research analyst registration no. is INH000016223.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.