High dividend yield stocks, are considered ‘Safe Havens’ and are preferred by a particular sect of investors. This happens more so when equity markets are in a bearish phase and growth stories are scarce. However, the pertinent questions to ask before buying are whether such high dividend yield stocks can sustain current level of dividends and are they insulated from capital loss (attractively priced on fundamentals). To make it a single question, are they a Value Buy or a Value Trap? Though we started with the intention of searching for recommendable ‘Value Buys’, we ended with concluding most of them as ‘Value Traps’.
The screening methodology we followed was simple. From the broad universe of BSE 500, we tried to select the most appropriate sample by keeping different hurdle rates of dividend yields for different capitalizations.
We used hurdle rates of 3.5%, 4.5%, 5.5% and 6.5% for companies belonging to Category I (M-Cap >Rs50bn),
Category II (M-Cap Rs30-50bn), Category III (M-Cap Rs10-30bn) and Category IV (M-Cap <Rs10bn)
respectively. By doing this, we have evened out, to an extent, the risk-reward in the selection. Therefore, our
results are not skewed towards smaller capitalization stocks (which are inherently risky).
Indiabulls Real, Ambuja Cements, MTNL, Canara Bank, Bajaj Auto, Tata Motors, ACC, HCL Tech – 3.5% dividend – with market capitalization of more than Rs50bn
Syndicate Bank, Ashok Leyland, Castrol, Chennai Petro – 4.5% dividend – with market capitalization in between Rs30-50bn
Bongaigaon Ref, Varun Ship, Andhra Bank, HCL Info, Wyeth, Bk of Mah, Wochardt, Vijaya Bank, Allahabad Bank – 5.5% dividend- with market capitalization in between Rs10-30bn
Royal Orchid, GIC, Ador Welding, Mirc Electronics – 6.5% dividend – with market capitalization <Rs10bn
- Please read: Trading Rule 1: Divide Your Trading Capital into Ten Equal Risk Segments
- Trading Rule 2: Use a Two Step Order Process
- Trading Rule 3: Buffett’s Tips: Don’t Overtrade, or Panic