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Wednesday, May 16, 2012

Bank the dividends from PSU banks

There is bad news all around. High inflation, negative IIP number, sliding GDP, increasing fiscal deficit, scams and corruption. Anything that can go wrong seems to be going wrong in India.

Add to that the uncertainty caused by debt problems in the Eurozone, which is not helping exports. No wonder the stock market is in a tailspin with no bottom in sight.

Where can one invest without losing sleep? In this month’s guest post, Nishit suggests that tax-free dividend yields of PSU banks is a good place to park your investible surplus.

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The stock market is on a downward spiral. What should investors do? Where does one park one’s cash? The classic dilemma is between safety and preservation of capital and increasing wealth. There is an unexciting part of the stock market which is often unexplored since it is not very glamorous.

These are the PSU banks. They provide steady dividend yields in excess of 5%. Dividends are not taxable in the hands of investors. So, a dividend yield of 5% is equivalent to a return of 7.2% per annum on a bank Fixed Deposit (provided one falls in the highest tax bracket).

To prove this theory I have taken two case studies of Andhra Bank and Corporation Bank. Andhra Bank has declared a dividend of Rs 5.50 per share and it is currently trading at Rs 106. This gives a dividend yield of about 5.2%.

Now, people may argue whether such a dividend will continue in the future? The answer is ‘Yes’ because Andhra Bank has been a steady dividend payer. The dividend for last year also was Rs 5.50. Before that, it was Rs 5 and before that Rs 4.50.

If the stock price goes up and one finds that one has made enough profit, the stock could be sold. The stock had hit highs of Rs 189 and Rs 159 in the previous years.

The second stock is Corporation Bank. It has declared a dividend of Rs 20.50 per share (last year it declared a dividend of Rs 20). The stock trades around Rs 400, giving a dividend yield of 5.1%.

Now, if the stock price declines due to adverse market conditions, one can always add more. Andhra Bank had hit a low of Rs 77 last December giving a dividend yield of 7.14%. Almost similar was the case with Corporation Bank.

The Government is in need of money and keeps pushing the PSUs to pay liberal dividends. The downside to this strategy is if the bank does not declare dividends at all. For this one needs to keep a cursory glance at the Quarterly results and go in for mid-sized PSU banks. The dividend may decline at the most but it is unlikely to get stopped completely.

In times of uncertainty and with questions of where to park the money, this is a low risk strategy. One could always trade in and trade out of these stocks to reduce the cost of acquisition. In 2001, I had bought Andhra Bank shares for Rs 12 in the IPO. If I had held on to them all these years, the dividend yield would have been almost 50% every year for me now.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

2 comments:

Nishank said...

But banks are already under pressure to maintain the Capital adequacy and Basel norms. There has been wide spread discussion on infusion of equity in large and mid size banks by the government. In view of this, the dividend payouts may be expected to reduce.

Nishit Vadhavkar said...

Possible but Corporation Bank eps is Rs 100 out of which dividend paid out is Rs 20.

Andhra Bank eps is Rs 13 thus giving sufficient headroom for more dividends.