Top Dividend Paying Stocks Of 2023

One of the popular themes of investing in equities is to investing in stocks that pay high dividends. But, what do we mean by high dividends. Is it about highest dividend paying stocks or the high dividend stocks? The most popular definition of high dividend is the high dividend yield, which is the dividend per share divided by the stock price. Normally, high dividends indicate companies with financial stability, willing to share profits with owners. Dividends you earn on the stocks can be an additional source of income. High dividend yield acts as a price support for the stock since companies normally do not fall below an average cut-off dividend yield in most cases. Dividends are taxable as regular income.

How do we understand dividend and the dividend yield? What does it imply to be buying the highest dividend paying stocks or the high dividend stocks A company utilises its profits in two ways. It can either pay out as dividend or reinvest it into the business and indirectly benefit the shareholders through price appreciation. Normally, companies with substantial investment opportunities tend to pay lower dividends and reinvest more into the business. On the other hand, companies with stable models and limited business opportunities pay out more as dividend. This is an important point since high dividend yield companies tend to get low P/E valuations. However, high dividend yield stocks are a good investment because it indicates that the stock is undervalued. Also, dividends provide a good source of passive income. Here we go on high dividend yield stocks and top dividend paying stocks.

What are dividend stocks and how do they work?

Before we get into dividend yield stocks, let us understand what is dividend yield. Dividend Yield is the ratio is dividend per share (DPS) for the most recent fiscal year divided by stock price. You can also divide market cap of the company by the total dividend paid out. A dividend is a portion of the company’s profit paid out to shareholders. Normally, companies with dividend yields above 4% per annum are high dividend yield stocks. In case of stable companies in matured businesses, even a lower ratio is acceptable. Let us look more into highest dividend paying stocks and high dividend stocks.

However, dividend yield must not be seen in isolation. It must be seen in conjunction with the CAGR (compounded annual growth rate) of returns. The other option is to look at the ROI or the return on investment. The view is that companies with higher ROI pay out lower dividends since the can reinvest the funds in the company at higher ROI and boost value. However, there are companies that offer high ROI and high dividend yield, which is the attractive quadrant. Now for high dividend yield stocks and the top dividend paying stocks.

Best Dividend Paying Stocks Of 2023

When it comes to dividend paying stocks, it is always best to look at dividend yield of large stable companies. Here is a quick list of the high dividend yield stocks and the top dividend paying stocks.

When it comes to dividends there are 3 things to observe. The first thing is the rupee dividends paid out. The other two are the dividend per share and the dividend yield. Of these measures, the dividend yield is the most reliable parameter. Normally, a dividend yield of 4% or higher is considered to be attractive. More so, if it comes from a stable and established company, as evident in the list above.

Factors to consider when evaluating high dividend paying stocks

When it comes to identifying the best dividend paying stocks, here are 3 factors that you must consider.

•    Compare the ROI of the company with the dividend yield. A dividend yield of over 4% and a ROI of over 15% is a very comfortable situation to be in. However, you must be wary if the company with high ROI is paying out high dividend yields. Also, be wary if companies with low ROI are not paying out dividends to their potential.

•    Generally, the belief is that the high dividend paying stocks are safer than other growth stocks. What is the justification for this? In the event of a sudden market crash or decline, high dividend paying stocks do not lose their value to the extent of other high beta stocks in the market. These stocks also help in diversifying the risk potential. But, you must be prepared to limited capital appreciation on such stocks.

•    Look at the income statement and the balance sheet before investing in a company because of a high dividend yield. For example, there are companies that pay out special dividends and that can make the dividend look tad too attractive. You must be cautious of that. Also, be wary of cyclical businesses where dividend pay outs tend to be high in the up cycle but tend to taper in the down cycle. You must, therefore, focus on sustainable dividends only.

How to identify the best high dividend paying stocks

Typically, the best dividend yield stocks must be a combination of solid dividend yields, a stable business model, track record of profits and a good ROI. Also, look at the CAGR returns of the stock over a 5-year periods. Here are some good dividend yield picks.

a)    GAIL India Ltd (CMP – Rs105.50) is a 30-year-old PSU company and is India’s leading natural gas company with diversified interests across the entire natural gas value chain. It has shown sustained growth in profits and dividend yield over time and is one of the Navaratnas of the government of India. It has 5-year average ROI is 13.93% and dividend yield of 6.48%.

b)    Hindustan Zinc Ltd (CMP – Rs312.40) is India’s largest and world’s second-largest zinc-lead miner. Its assets include lead-zinc mines, hydrometallurgical zinc smelters, lead smelters etc. It is majority owned by the Vedanta group of Anil Agarwal and the government still holds a residual stake in the company. HZL has a 5-year average ROI of 22.72% a dividend yield of 5.83%.

c)    Tata Steel Ltd (CMP - Rs104.50) is a diversified and integrated steel producer and straddles the entire value chain of steel. It has substantial operations in Europe through its 2007 acquisition of Corus in Europe. The company has 5-year average ROI of 12.04% and a dividend yield of 4.84%.

d)    Bajaj Auto Ltd (CMP – Rs4,033.30)) is the first two-wheeler company in the world to scale market cap of Rs1 trillion. Its exports are as large as the domestic franchise, which is what makes it auto model unique. The company has 5-year average ROI of 20.79% and a dividend yield of 3.93%.

e)    HCL Technologies Ltd (CMP – Rs1,093.05) is one of the leading top-5 IT companies in India, which has generously rewarded shareholders through dividends and buybacks. It offers IT infrastructure management services, digital process automation and cloud- services. Bulk of its revenues are from new businesses. HCL Tec has 5-year average ROI of 20.69% and a dividend yield of 3.88%.

f)    JSW Steel Ltd (CMP – Rs683.55) is part of the Sajjan Jindal group. It is engaged in production and distribution of iron and steel products. The company has a 5-year average ROI of 13.26% and a dividend yield of 3.20%.
These are some of the frontline stocks that combine good dividend yield with healthy ROI and also have a track record of consistent profits and dividend pay outs.

Advantages of investing in high dividend paying stocks

Let us look at some of the merits of investing in such high dividend yield stocks.

•    High dividend yield stocks are a source of passive income. Of course, high dividend yield stocks were a lot more attractive when the dividends are tax free, but they are still a signal that the company is making enough profits to distribute to shareholders.

•    You can reinvest dividends at even higher yields if there are opportunities. It allows you to regularly monetize part of your investments in a smart manner.

•    They are less risky than other stocks as the high dividend yield acts as a kind of support for the stock.

•    Due to the above reasons, such stocks are less prone to volatility and tend to be stable low-risk stocks in the long run.

Risks involved in investing in high dividend paying stocks

There are some risks in dividend yield stock investing. Firstly, such dividends may not be sustainable or may by cyclical. But the bigger risk is that these high dividend yield stocks tend to be less favoured in terms of valuations. That means, high dividend yield stocks generally get a lower P/E ratio in the market.

Tips for successful investing in high dividend paying stocks

Do not look at one-time dividend yield but look at sustainable dividend yield. Also, avoid penny stocks paying high dividends as these can be partial liquidation of the business. Stock to the profitable names with high ROI and dividend yields above 4%. That is a good list to start with for top dividend stocks and the best dividend shares.

Conclusion

High dividend yielding stocks are indicative of companies with financial stability. It also shows that the company has sustained profits and its stock can give good returns over time. However, it has also been observed that high dividend stocks do not command the best of P/E ratio, so what you gain on dividend, you may lose on capital appreciation. You have to take a balanced view on top dividend stocks and the best dividend shares.

FREQUENTLY ASKED QUESTIONS (FAQ)

How much money do I need to invest in high dividend paying stocks?

The dividend yield is on the price, so the amount of investment is immaterial. 

Can I invest in high dividend paying stocks through a broker or online platform?

Most brokers and online platforms offer this as an add-on facility wherein you can screen such stocks.

How do I monitor my investments in high dividend paying stocks?

It has to be monitored in terms of the business cycle, stock news, sector news etc.

What is the long-term potential of high dividend paying stocks?

Top dividend stocks and best dividend shares is a trade-off between high dividend yields and lower P/E ratios. You have to take a balanced call.