Investing in dividend stocks is fast gaining popularity in India as this strategy can help shareholders create a steady stream of recurring income at a low cost. Dividend stocks are those that regularly return some portion of their earnings to shareholders in cash.
This means dividend-paying companies must be able to generate stable cash flows across market cycles to help them sustain – and even increase – these payouts over time.
Now, before we get to the stocks, let’s understand the basics.
A stock’s dividend yield and share price are inversely related. For example, a stock trading at ₹100 that pays shareholders an annual dividend of ₹5 a share, offers a yield of 5%. Now, if the stock falls to ₹80, the yield increases to 6.25%, while if the price rises to ₹120, the yield falls to 4.2%. Similarly, if the dividend payout goes up or down, the price remaining the same, the dividend yield moves in tandem.
This suggests that a beaten-down stock might offer a tasty dividend yield. However, several other factors must be considered in addition to a stock’s yield, such as earnings and cash flow growth, balance sheet debt, and the payout ratio. The aim is to identify a portfolio of companies that can maintain these payouts even when markets become turbulent.
Here are four blue-chip stocks that offer shareholders attractive dividend yields of more than 4%.
With a market cap of ₹3.78 trillion, ONGC offers a dividend yield of 4.1% as its dividend payments over the past 12 months have totaled ₹12.25 a share.
ONGC explores and produces crude oil and natural gas in India and international markets. It also refines and markets petroleum products, transports oil and natural gas, and produces liquefied petroleum gas, butane, aviation turbine fuel and other commodities. ONGC generates wind power, too, with a total installed capacity of 153 megawatts, and another 36.52 megawatts of capacity for solar energy.
ONGC has more than doubled its free cash flow from ₹1.56 trillion in FY20 to ₹4.73trillion in FY24. Given its outstanding share count, the company’s annual dividend payout is less than ₹16,000 crore, while its interest expense totaled ₹56,948 crore in FY24.
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We can see that ONGC generates enough cash flow to cover its dividend and interest payouts, which allows it to reduce its balance sheet debt and make acquisitions. Improving cash flows have allowed it to raise its dividend from ₹5 a share in FY20 to ₹12.25 a share in FY24.
Here’s the dividend it has paid per share in each of the past five years.
ONGC has been a dependable dividend payer, and with a potential yield of about 4.3%, it’s a good one as well.
Coal India, with a market cap of about ₹3 trillion, produces and markets coal and coal products. It offers coking coal, which is used in the steel-making and metallurgical industries. It also provides non-coking coal, used as thermal-grade coal for power generation and manufacturing cement, fertiliser, glass, ceramic, chemicals and bricks.
Coal India was incorporated in 1973 as the Coal Mines Authority after the sector was nationalised. A ‘Maharatna’ company, it is the single largest coal-producing firm in the world. It operates in eight Indian states and has a fully owned mining company in Mozambique that has yet to begin operations. It drives India’s coal production, accounting for 80% of the country’s total output.
Over the past year, Coal India has paid shareholders a dividend of ₹25.5 a share, which translates to a yield of more than 5%.
With a payout ratio of 42%, the company’s dividends are sustainable. However, its growth story is far from over, given that it plans to invest close to ₹67,000 crore by the end of 2030 to build coal-fired power plants.
These plants will be located near mines, which will reduce transport costs and boost profit margins. The company is also diversifying its cash flows as it aims to build renewable power stations and mine other critical minerals.
While India continues to invest heavily in clean energy, fossil fuels are expected to remain a key component of its energy mix.
Indian Oil, valued at ₹248,000 crore by market cap, is controlled by the government of India. IOC has business interests that encompass the entire hydrocarbon value chain, from refining, pipeline transportation, and marketing petroleum products to exploration, production, and natural gas petrochemicals.
Indian Oil is the country’s largest oil refining company. It owns 11 refineries and accounts for a third of India’s refining capacity. Its capacity utilisation fell to 90% in FY21 because of the pandemic but has since increased to pre-pandemic levels. With more than 15,000 kilometers of pipelines across India, it’s a diversified oil and gas company.
It also operates 34,500 petrol pumps, around 13,000 LPG distributors, and 7,000 bulk consumer pumps. It’s a leader in the energy infrastructure market, controlling 42% of retail outlets, 51% of LPG distributorships, and 48% of aviation fuel stations in India.
In the past 12 months, Indian Oil has paid shareholders cumulative dividends of ₹12 a share, indicating a forward yield of almost 7%. Its free cash flow totaled ₹3.39 trillion in FY24, while its dividend payout was less than ₹16,000 crore.
IOC’s dividend payout has averaged less than 50% of its earnings in the past three years.
Hindustan Zinc, which has a market cap of ₹2.06 trillion, is the world’s fifth-largest silver producer, with annual production exceeding 714 tonnes. It also has a share of about 75% in India’s zinc market.
Zinc accounted for 62% of total sales in FY24, followed by silver (19%), lead (15%) and others (5%).
Hindustan Zinc says its focus on backward integration and low-cost, high-grade zinc reserves make it the lowest-cost zinc producer. Its facilities are located in Rajasthan and Uttarakhand.
Rising commodity prices have driven the stock up 125% in the past five years. For comparison, its revenue rose from ₹1.83 trillion in FY20 to ₹2.8 trillion in FY24, a gain of 53%.
Hindustan Zinc’s reserves and resources capacity stood at 456.3 million tonnes at the end of FY24. At its current mining rate, this capacity is sufficient for more than 25 years. In the past five years, its reserves and resources have increased by 35%, given the production of 65.1 million tonnes of ore in FY24.
Based on its dividend payout in 2023, the stock offered a juicy trailing yield of 14%. However, investors should note that these payouts included special interim dividends, which are based on earnings and can be stopped at any time.
Notably, while Hindustan Zinc’s dividend payout was high, its payout ratio was more than 300% in fiscal 2023. This is obviously not sustainable over the long term.
In the past 12 months the company has paid shareholders ₹29 a share in cumulative dividends, indicating a yield of 6%.
You can consider reinvesting the dividends you receive to buy more shares of these companies and increase your dividend income over time. Alternatively, you can invest the dividends in other assets to diversify your portfolio.
A word of warning: you shouldn’t invest in dividend stocks solely based on the dividend yield. You should instead focus on the quality of these businesses and their ability to maintain dividends in good times and bad. As for the dividend itself, the key is to find out how sustainable it is over a long period of time.
For more such in-depth analysis, read Profit Pulse.
Note: The purpose of this article is only to share interesting charts, data points and thought provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
Aditya Raghunath has more than 15 years of experience in finance and financial writing. His interests extend to global stocks as well. He studied commerce at Mumbai University and finance at the prestigious T A Pai Management Institute.
Disclosure: The writer does not own shares in any of the companies mentioned above.
