High Dividend Yields Can Be Deceptive

Investing for dividend yield in India is a minefield. Here’s how you can navigate it

- Aarati Krishnan

With shaky banks and defaulting NBFCs, many Indian investors are beginning to wonder if dividend-yield stocks are a better bet for their income needs. The recent market correction has also expanded the basket of stocks offering lucrative double-digit dividend yields.

But dividend-yield investing in India, like value investing, is a minefield. To succeed at it, you’ve got to put extra effort into researching a company’s profit and dividend history and business prospects. Here are some checks to avoid the risks.

Special dividends

Most stock screeners calculate dividend yield by dividing a company’s latest annual dividend per share by its latest stock price. While this is indeed the correct way to capture dividend yield, selecting stocks based on this parameter can leave you high and dry if the ‘yield’ was propped up by a one-offdividend in the latest year.

Companies that are regular dividend-payers may suddenly declare a special dividend in a particular year to distribute proceeds of an asset sale or a spin-off. P&G Health (formerly Merck) today pops up on many ‘high dividend yield’ screeners because it declared a total dividend of ₹440 per share for CY2018, translating into a 10 per cent dividend yield on the current stock price of ₹4,400. But if you buy the stock hoping to mop up 10 per cent from dividends every year, you’d be sorely disappointed because that’s not a sustainable payout.

In 2018, ₹416 of the company’s ₹440 dividend per share came from a special distribution that it had made after transferring its biopharma and life sciences business to Merck Life Sciences. Companies also declare special dividends to mark anniversaries or other landmark events.