Dividend yield of CPSE stocks to rise: ICICI Securities

High dividend yield stocks appear attractive as their yields are now comparable with other fixed income instruments while having the added advantage of the ‘inflation hedge’ characteristic of stocks as asset class, said ICICI Securities, in a research note. Based on consensus forecasts for CPSE index stocks (where available), it is apparent that the dividend per share for most CPSE stocks are expected to rise over FY20-23, the domestic broking house further said.

“The rise in DPS is supported by rising EPS and FCFO (future cash flow from operations) over the same period,” it said.

According ICICI Securities, Coal India, Hindustan Zinc, ONGC, GAIL (India), Bharti Infratel, NMDC, ITC, PowerGrid Corporation and Indian Oil top the dividend yield stocks currently.

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Observation of rolling one-year returns indicate that bulk of the outperformance of Nifty Dividend Opportunities 50 index was during the FY10-12 period when real yields remained negative persistently. “Over the past one year, as interest rates continued to dip and inflation rose, the real interest rate has dipped into the negative territory, which improves the prospects for high dividend yield stocks.”

Cash flow

As per our capex analysis, India Inc’s capex during FY20 stood at ₹5.4-lakh crore compared to ₹5.8-lakh crore in FY19, while cashflow from operations improved to ₹8.8-lakh crore. Going by the management commentary and the macro challenges of weak demand and lower utilisation levels in the system, we expect private capex to remain subdued in the near term, while cashflows improve, leaving more financial resources for dividends and buybacks, the note further added.

Weight in index

Amongst the equity benchmark indices, the CPSE and Dividend Opportunities 50 index have the highest dividend yields currently at 6 per cent and 3.65 per cent, while the lowest are offered by Growth Sectors 15 and Bank Nifty at 0.99 per cent and 0.4 per cent, respectively.

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However, as high yielding assets are associated with high risk (high yielding bonds are considered junk) and efficient markets will price higher risks with higher yields, a prudent dividend yield strategy should be considered to control these risks by identifying stable businesses with robust fundamentals (adequate RoEs and cashflows) and a check on ‘quality of earnings’, it has advised.