While many stocks at their current market price offer a mouth-watering dividend yield, in reality they are a trap as the financial health of many of these companies are deteriorating. Commodity stocks top the dividend yield table and companies like Cairn India, NMDC, Oil India, Vedanta and others now have a dividend yield in excess of 5%. However considering the recent correction in commodity prices, many of them will have lower operating cash flow and that will impact their ability to sustain last year’s dividend payout.
Take for instance, NMDC which is trading at a tempting over 9% yield. Last year it made a profit of close to ₹4,000 crore and given the high government holding, the entire operating cash was distributed as dividend. In H2FY16 so far, its average realisation has fallen 42% to ₹2,480 per tonne compared with ₹4,274 per tonne last year. Hence, to maintain last year’s dividend, it will have to dip into the existing cash (₹18,500 crore), which the management is holding back to fund its forward integration into steel manufacturing.
Similarly in oil and gas, after the steep correction in the price of crude, the stock price of companies in that sector has been hit. Cairn India, a consistent divid