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Messiahs of Volatile Markets

High dividend yield companies are potential value buys in volatile markets. Here are a few of them

A year that has given us more reasons to forget it, rather than cherish it, has finally gone by. After the stupendous successes seen in 2007, the fate of the financial and economical scenarios witnessed all through 2008 have no doubt come as a rude shock. But while 2008 has seen a woeful paucity of good news in the financial circuits, the belief remains that the great Indian growth story isn't over hitherto.

India is very much one of the world's leading growing economies and 2008 has just been a speed-breaker in our country's race towards economic boon. Years like 2008 will always take the country a year or two back, but that doesn't mean we lose all hope. On the other hand, what we should do is take times like these with a pinch of salt and try to ride through them. And one way of mitigating the ambivalence surrounding the stock markets is to invest in high dividend yield stocks. Good dividends come in handy during such times and make the wait for the markets to turn around more bearable.

However, a caveat here is that there are companies who may give high dividend just to lure the investors and that too by depleting reserves. Moreover, fall in prices can also result in higher yield. This actually means that you might end up with a high dividend yielding stock yielding higher but trading at a huge discount to its buying price.

Hence, to arrive at a shortlist of potential candidates that you can look to invest in, we eliminated those companies that have high dividend yield but whose profits in the first three quarters of this year has remained stagnant or have reduced compared to the corresponding quarters of 2007. Moreover, considering the current market scenario, we made a judgment call of limiting our search to the companies with more than Rs 1,000 crore in capitalisation.

The choice set by this process came down to 26 companies. But for the sake of quality, we further removed the companies with double digit dividend yield from the list. We are of the view that it is impossible to maintain double digit dividend yield for a very long period. Moreover, when a majority of the companies are in single digit, then the double digit dividend yields of these companies raises suspicion. The final list comprises 23 companies. Companies like ONGC, Tata Steel, Tata Tea, SAIL, etc., can always be termed as quality picks. Each of them is a dominant force in their respective industries. They have a strong balance sheet, which regardless of any economic downturn would be able to stand the ground.

Considering the market as a whole trading at a PE of around 10, many of the companies at the current level are trading at a discount. There are two companies that have execptionally high price earning ratio (PE) than the others - Castrol India and Tata Tea.

The exploits of the Tata Tea are very much a lesson for Corporate India. From just a domestic player, it is now a dominant player in both the domestic and international markets. At the current levels with a fall of just 34 per cent in its prices it commands a PE of 22.60. Taking into account of the nature of the business and its position in the market, it is actually trading at a bargain.

Castrol India has done exceptionally well to stem the tide in 2008. This lubricant company has slowly and steadily increased its market share in India. It is currently the second largest company in this segment in India. With just -11.84 per cent fall in prices in 2008, and dividend yield of 4.84 per cent the stock can hold the mainstay in any portfolio.

The presence of a number of public sector units (PSUs) in our list would scarcely surprise anybody. As the government is the principle shareholder, in all of these companies and it would certainly want to have a share in the profits these public sector companies generate. So these companies declare regular dividends to keep the principal shareholder happy. Hence, one would always find them among the highest yield companies list.

Go ahead and take a look at the table to know the 10 highest dividend yielding companies.

Methodology

First we removed all the companies whose profits has not increased or has remained stagnant in the first 3 calendar quarters of the year 2008 compared to 2007.

Then we removed any company with capitalisation less than Rs 1,000 crore.

Lastly we removed the companies with double digit dividend yield.



High Dividend Yield Stocks
Company  Industry  Price (Rs)  P/E   Beta  YTD Return (%)  Div Yield (%)  Earnings Growth (%)  MarketCap. (Cr)
Oil & Natural Gas Corpn. Oil Exploration 670.4 8.01 1.17 -45.78 7.46 13.58 143390
Tata Steel Steel 217.45 2.86 1.13 -76.74 7.36 27.45 15887
Tata Tea Tea 591.7 22.6 0.93 -34.67 5.92 217.43 3659
Tata Chemicals Soda Ash 156.9 3.84 0.98 -61.97 5.74 132.99 3690
Bajaj Auto Two & three wheelers 394.7 8.22 - - 5.07 14.04 5711
Indian Overseas Bank Bank 69.25 3.43 1.26 -61.25 5.05 4.9 3773
Steel Authority Of India Steel 73.55 3.89 1.43 -74.13 5.03 21.34 30379
Mahanagar Telephone Nigam Telecom 79.85 9.58 1.08 -58.48 5.01 7.86 5031
Castrol India Lubricants 320 14.46 0.57 -11.27 4.84 33.09 3956
Rural Electrification Corpn. Developmental Financing 69.85 5.35 - - 4.29 3.15 5998
* Data as on December 24, 2008