What is Dividend Yield?

It is not uncommon for readers of newspapers to come across companies listed on stock exchanges to come out with advertisements proclaiming their stellar annual results. These advertisements may most probably include an item on dividends stating, “Annual Dividend 300%”. While the reader may be awestruck by the large percentile number, some may not have actually understood its actual import. What is a dividend, annual dividend paid and dividend yield? Let us examine in the following paragraphs.

Dividend:

Companies exist to produce products and render services to satisfy the needs of people. In the process of meeting customer needs, corporations also strive to earn profits and distribute a portion of the profits to the shareholders in the form of dividends. In other words, dividends are the rewards to investors for having invested in the company.

Quantum of Dividend:

Dividend paid can be expressed in many different ways; as an absolute figure like $350 million or as a percentage of the total net profit of the company, 30% of the net profits or as dollars per share, say $0.50 per share or finally as a percentage of the nominal or face value of the share, say 300% of the nominal value of the share, which was the subject matter of the above sited advertisement.

Dividend Yield:

The quantum of dividend expressed in various ways is of little significance to the investor unless it is translated into a relationship to the price paid or amounted invested.

Let us examine the dividends paid by two companies, NMDC Ltd.  The following data is extracted from the website of the popular financial newspaper, ‘The Economic Times’:

The face value of NMDC’s share is Rs.1, which means that the company paid Rs.1.50 and Rs.9.50 per share to shareholders on the two occasions for the financial year 2015-16.

The current market price of the share is Rs.100 on 29^th July 2016 and therefore the website shows the dividend yield of 11%. The yield has been obtained by applying the formula:

Dividend Yield = (Total Dividend Received ÷ CMP) × 100

(Rs.11 ÷ 100) × 100 = 11%

The website calculated the yield based on the current market price of the share as the site is not an investor, does not hold shares, does not have a cost of investment, therefore.

However, an actual investor has a cost of investment, being the price paid while purchasing the share. Suppose an investor had actually purchased NMDC shares at say at Rs.83 apiece, the dividend yield is:

Dividend Yield = (Total Dividend Received ÷ Cost of Investment) × 100

(Rs.11 ÷ 83) × 100 = 13.25%

When different numbers of shares were purchased at different prices, then we take the weighted average holding cost as the cost of investment for calculating the cost of investment. Let us assume that an individual had purchased 100 shares at a price of Rs.126 and another 200 at Rs.100, the weighted average cost of investment will be:

Purchase 1	100	126	12,600
Purchase 2	200	100	20,000
Total	300		32,600

Weighted Average Cost of Investment = 32,600 ÷ 300 = 108.67

The Dividend Yield for this investor will be:

(Rs.11 ÷ 108.67) × 100 = 10.12%

Thus, ‘Dividend Yield’ is a very important metric with which an investor is able to measure the return on his investment from a particular stock or scrip.

Credible Stock Market Tips for October 2017

Investors look forward to credible stock market tips at the beginning of every month for investing. The stock news is full of junk tips from equally rubbish quacks. So what the investors are looking for is credible stock recommendations. So, as usual, I write this monthly article providing reliable stock market tips based on sound logic.

This month, October 2017,  I have liberalised the rules for buying stocks a bit.

Why?

Because the market is too hot. Perhaps there is excess liquidity in the market? Of course there have been a few crashes in September but still, the stock market is at a high. The scorching markets have made stocks expensive across the board. And if we don’t make the belt loose we will not be able to buy any stocks and do justice to the good companies listed in the ‘Portfolio2K15‘.

As in the last month, I have tightened the dividend yield criterion this month too. But unlike last month, this month I set a hurdle rate of a minimum 4.00% dividend yield. Only those stocks that jump over this hurdle will get allocation under this category.

I have set a liberalised yet strict rules such that besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the four criteria prescribed below:

1. The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalization from a stringent 1.00 earlier.
2. The Price to Earnings (PE) Ratio shall be below 15. This is again liberalization from the tough hurdle of 10 earlier.
3. The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
4. The Dividend Yield shall be more than 4.00%. This is tightening from the last month’s 3.50%. Further, a mere good dividend yield is not sufficient. In addition, the stock must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BV criteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investable sum is taken as multiples of 20,000, that is Rs.20,000, 40,000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 20,000 is equally distributed among the four criteria at Rs.5,000 each or multiples thereof.

Summary of Stock Market Tips/ Recommendations

This October 2017 all the stocks constituting our Portfolio 2K15 qualified, however National Aluminium Company Ltd., whose price had appreciated throughout September, though managed to qualify could not earn enough allocation even to buy a single share! On the other hand MOIL Ltd., which could not earn enough allocation for many months in past made the mark this month.

13 stocks qualify for investment in October 2017. An unlucky 13? Please don’t bother. I assure you that these 13 stocks will be the luckiest thing ever happened to you.

Stock Market Tips Based on Price to Book Value Ratio

Let us examine the stocks under the important price to book value ratio criterion.

Stock Recommendation Based on Price to Earnings Ratio

Please see the table depicting the stock recommendation based on price to earnings ratio criterion.

Stock Market Tips Based on PE x P2BV Criterion

The product of the price to earnings and price to book value ratios is also an important criterion. As per value investing principles, this number shall not be more than 22.5 (1.5 * 15). Let us see what stocks pass this test.

Stock Recommendation Based on Dividend Yield Criterion

The dividend yield is an important aspect in stock selection. Let us see how our stocks fare under this key criterion.

We see that five of the 14 stocks could not pass the hurdle.

Conclusion

To conclude my stock recommendation for this October 2017 is to buy the 13 stocks in the recommended numbers for each 20000 of your investment. Happy Deepavali and investing!

Hindustan Zinc Dividend Yield Translates to 18.43%

On 22 March 2017, Hindustan Zinc Ltd. declared a special interim dividend of Rs.27.5/share which on a face/ nominal value of the share of Rs.2 translates into a 1375%. This translates into a stellar dividend yield of 16.43%, tax-free!

Our ‘Portfolio 2K15’ holds as on day (25^th March 2017) 136 equity shares at an average holding cost of Rs.167.39 (current market price Rs.323.25). Therefore a dividend per share of Rs.27.50 translates into a dividend yield of 16.43% - the icing on the cake is that this dividend is entirely tax-free.

Let us look at the situation from a slightly different angle. The dividend per share of Rs.27.50 on an average holding cost of Rs.167.39 means that the cost of our investment has already been recovered to the extent of Rs.27.50 leaving the average cost holding at Rs.139.89 (167.39 – 27.50), which will further boost the future dividend yields, both regular and special.

Please note that for Hindustan Zinc, being a wonderful company it is, declaring such special dividends is becoming a regular habit. The company had declared a special dividend of 1200% or Rs.24 per share just last year!

After deducting the dividends earned from Hindustan Zinc after this Portfolio 2K15 has been created, the dividend yield after adjusting all the dividends so far amounts to a whopping 18.43%, tax-free.

Assuming that Hindustan Zinc will declare another special dividend next year to the same extent, our dividend yield after reducing all dividends from investment will be 22.60%! Please see the picture below.

What Stocks to Buy in May 2017?

This month we have liberalised the rules for buying stocks a bit. Besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the three criteria prescribed below:

1. The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalisation from a stringent 1.00 earlier.
2. The Price to Earnings (PE) Ratio shall be below 15. This is again a liberalisation from the tough hurdle of 10 earlier.
3. The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
4. The Dividend Yield shall be more than 0%. However, a mere good dividend yield is not sufficient. In addition, the scrip must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BV criteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investible sum is taken as multiples of 20,000, that is Rs.20,000, 40000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 20,000 is equally distributed among the four criteria at Rs.5,000 each or multiples thereof.

Another significant adverse development in April is the demise of a great, cash rich company, CAIRN India, which is merged with its debt-laden parent, Vedanta Ltd. Trading in Cairn has been suspended from 25^th April 2017. With a heavy heart we remove Cairn from our list.

Finally you will observe that a few companies like NMDC, MOIL and Hindustan Zinc are dropped. Kindly note that these companies are dropped not because of the quality of stocks – these are wonderful companies – the only reason for rejecting them is that they are presently expensive; once their prices fall and the valuations become reasonable, we will start buying them.

The stocks that made the cut are:

Price to Book Value (P2BV) Ratio Criterion:

Serial Number	Stock	Total Allocation	CMP 3rd May 2017	Total Shares to Buy
1	NHPC	1660	31.7	52
2	PFC	3805	160.9	24
3	REC	3494	210.8	17
4	NMDC	0	--	0
5	SJVN	1569	35.4	44
6	Neyveli Lignite	1468	103.5	14
7	ONGC	1712	191.1	9
8	NALCO	396	68.55	6
9	MOIL	0	--	0
10	HZL	1247	264.8	5
11	OIL	1802	330.05	5
12	GE SHIP	1986	436.5	5
13	VEDANTA	0	--	0
14	SCI	861	78.35	11
	Total	20000

Price to Earnings (PE) Ratio Criterion:

P2BV*PE Combined Criterion:

Serial Number	Stock	P2BV*PE	Discount (22.5 – PE*P2BV)	Weightage	Allocation of Investible Amount Rs.5000
1	NHPC	13.4696	9.0304	9.25%	463
2	PFC	3.6875	18.8125	19.27%	964
3	REC	4.9248	17.5752	18.00%	900
4	NMDC	26.1274	-3.6274	FALSE	0
5	CAIRN	67.936	-45.436	FALSE	0
6	SJVN	13.5978	8.9022	9.12%	456
7	Neyveli Lignite	13.6165	8.8835	9.10%	455
8	ONGC	11.8888	10.6112	10.87%	544
9	NALCO	29.5936	-7.0936	FALSE	0
10	MOIL	33.152	-10.652	FALSE	0
11	HZL	40.38	-17.88	FALSE	0
12	OIL	11.6424	10.8576	11.12%	556
13	GE SHIP	9.559	12.941	13.26%	663
14	SCI	52.234	-29.734	FALSE	0
	Total (Positive Values)		97.61	100%	5000

Dividend Yield Criterion:

Serial Number	Stock	Dividend Yield	Weightage	Remarks on Dividend Yield	Allocation of Investible Amount
1	NHPC	4.69%	8.54%		801
2	PFC	8.63%	15.71%		751
3	REC	8.10%	14.74%		0
4	NMDC	0.00%	FALSE	8.59%	291
5	SJVN	3.14%	5.71%		270
6	Neyveli Lignite	2.91%	5.30%		413
7	ONGC	4.45%	8.10%		273
8	NALCO	2.94%	5.35%		0
9	MOIL	0.00%	FALSE	1.52%	1029
10	HZL	11.09%	20.18%		450
11	OIL	4.85%	8.83%		288
12	GE SHIP	3.10%	5.64%		0
13	VEDANTA	0.00%	FALSE	1.46%	0
14	SCI	0.00%	FALSE	0.00%	0
	Total (Positive Values)	53.90%	100%		5000

In the case of MOIL, even though the actual dividend yield is 1.52%, since the stock has failed in all the three previous tests, no allocation is made under the dividend yield criterion. In order to make it ineligible for allocation, the dividend yield is forcefully shown as 0% and under the ‘Remarks on Dividend Yield’ column the actual dividend yield is shown. Same is the case with NMDC, Vedanta and Shipping Corporation (SCI).

To conclude, we have identified 11 good companies' stocks that are fit for investing in the month May 2017.