Dividend Payouts From Indian Corporates Up 26%, Should You Buy High Dividend Stocks?

Total dividend paid by Indian corporates rose 26 per cent to Rs 3.26 trillion for FY23, driven by a growing economy, increased earnings, and buoyant markets.

The dividend payouts marks a huge jump from Rs 2.6 trillion paid out to investors in the previous fiscal year. The payout came from 317 companies of the BSE 500. The payout ratio of these companies also rose to 41.46 per cent in FY23, compared to 34.66 per cent in FY22. The dividend payout ratio is the ratio of dividends paid out to shareholders and net income of the company.

Among the top dividend-paying companies, Tata Consultancy Services (TCS) made a total payout of Rs 42,090 crore, up 167 per cent from the previous fiscal year.

Vedanta, a subsidiary of London-based Vedanta Resources, followed closely with a total dividend recommendation of Rs 37,758 crore, up 126 per cent from FY22. Hindustan Zinc came third, registering a whopping 319 per cent hike in dividend payouts. Other prominent companies in the top-10 include Coal India, ITC, ONGC, and Infosys, as reported by stock exchange data.

Should You Buy High Dividend Paying Stocks?

Dividends play a significant role in affecting stock prices. They attract investors by providing incentives distributed from a company’s profits. When a company pays dividends, any undistributed amount is added to the reserves and surplus, which contributes to the company’s financial stability. Consequently, substantial dividend payments indicate a financially healthy company and has the potential to boost stock value.

Investors often assess dividend payouts based on dividend yield, which is calculated by dividing the annual dividend per share by the stock’s market price. Many of the aforementioned companies have dividend yields exceeding 10 per cent, making them attractive to investors seeking solid returns on their investments and they hold on to such shares.

Capitalising on this trend, savvy traders strategically purchase such shares at least a month before dividend announcements, anticipating a rise in stock prices. New investors seeking to purchase high dividend stocks should note that once dividends are paid out, these traders sell their shares, generating substantial profits. Thus share prices may show an immediate decline following the distribution of dividends.

Basavaraj Tonagatti, a certified financial planner, says that investors should know about the risks associated with high dividend-paying stocks.  

“We have to verify for what purpose the dividend yield increased. Is it because of the company’s better performance or a fall in the price? Hence, rather than solely going by the rise in dividend yield, I strongly suggest investors look into the company’s financial performance, management, dividend payment history, and market reputation,” he says.

It’s crucial to understand that paying dividends is not obligatory, and a company can choose to reduce or eliminate dividend payments at any time. Especially considering the current global economic slowdown, there is a chance of dividend cuts or their complete cessation.  

Consequently, reduced dividends can undermine investor confidence and cause sharp declines in stock prices. However, given the favourable conditions prevailing in the Indian market, the current upward trend may persist, although select stocks and sectors characterized by a substantial reliance on global demand may be affected by the global recessionary trend.