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There is good news for investors. The dividend yield of several companies could jump in the short term following the abolition of dividend distribution tax (DDT). From 1 April, dividend will become fully taxable in the hands of promoters and therefore, some promoter-owned and closely held companies may declare high dividends before 31 March.However, the company’s holding structure will play a critical role here. “Promoters with individual holding will be the ones rushing to declare dividends before 31 March. The new tax law will benefit promoters in a corporate structure, so they may wait till 1 April,” says Vinod Nair, Head-Fundamental Research, Geojit Financial Services. “Though this new provision is tax neutral for PSUs, these may declare dividends to help the fiscal situation of the government,” says A. Balasubrahmanian, CEO, Birla Sun Life AMC. MNCs, on the other hand, benefit from the new rules and will not make a move before 1 April.In the long run, the change will increase the dividend yield of companies. As companies will try to maintain total outgo (dividends plus DDT) levels, an increase in the percentage of dividends declared is likely from next year. Due to the narrow rally in the benchmark indices, the dividend yield segment is underperforming (see chart) and the cheap valuation is another reason to look at this segment now.Dividend yield funds will beneft more from scrapping of dividend distribution taxTo allow money to multiply, investors should opt for growth option.
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Source: Accord Fintech; Data as on 17 Feb; Sorted on the basis of 5 yr CAGRDividend yield stocks you should look at nowInvestors should use dividend yield as a primary filter while selecting stocks and then analyse further
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Values as on 17 FebTake a holistic view Dividend yield is only one way of selecting value stocks and therefore, buying stocks only to get dividends is not the right strategy. “Investors should avoid buying stocks with highest dividend yields. Instead, they should use it as a primary filter and analyse further,” says Amar Ambani, President and Head of Research, Yes Securities. Vetri Subramaniam, Group President and Head Equity, UTI AMC concurs. “Instead of highest yield, focus on companies giving good dividends and with the ability to increase payouts,” he says.Dividend yield segment worth getting into now Current valuations are attractive
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Index values normalised to a base of 100.14 Feb 2020Dividend yield is calculated based on historical dividends. A high dividend yield now may not mean a company will pay good dividends in future. Indiabulls Housing Finance, with a historical dividend yield of 11.78%, is a case in point. Forced dividends are also not a good sign. A large numbers of PSU stocks are underperforming due to various reasons and the underperformance of dividend yield can be attributed to the inclusion of these PSUs in the index. Since PSUs continue to underperform, should one concentrate only on private companies? “Don’t avoid all PSUs. HPCL is looking good at current yield and valuation. Its margin is also expected to improve,” says Ambani.Advantage mutual fundsMutual funds schemes are an indirect beneficiary of the move to scrap DDT. “Though mutual funds schemes have a tax exempt structure, they were paying tax indirectly in the form of DDT. Doing away with it will boost NAV,” says Subramaniam. Investors in dividend yield funds will benefit the most. “The impact of the move will be higher in dividend yield funds because the portfolio yield will be higher there,” says Balasubrahmanian.Should you go with dividend option or growth option in dividend yield funds? “Dividend yield is a value oriented investing style and not a place to generate regular income. The dividend yield of this portfolio will be more than the index, but won’t be enough to sustain a high return of 7-9%,” says Subramaniam. In other words, a major portion of the return will come from increase in share prices and the preferred option should be growth to allow uninterrupted compounding. If you need regular income, use systematic withdrawal plans (SWPs).
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