Are you investing in PSU stocks for higher dividend yield? Beware!

’10 stocks that beat bank FDs with up to 10% dividend yield’,

‘How Top Dividend Paying Stocks in India Today’s tomorrow can disappoint’.

I read both the articles and formed my own opinion.

Earlier said that you are getting double the rate of FD as cash inflow every year. So this is a good chance.

Another talked about how yesterday’s dividend stocks can be money destroyers today.

The concept of dividend yield investing cannot be generalized. So let me talk about the mindset of retail investors instead of these stocks.

A few weeks ago a friend called me and asked if he could invest in REC as it offered 10%+ dividend yield.

His reasoning was also the same as in the first article. He believed that if something gives him 10% per annum as cash flow, then why do he need a tax inefficient FD. After all, FDs are taxed at 20%. Dividends are taxed in excess of 10% 1 m

How I want to invest and earn money was so easy.

But it is never so.

So should you invest in dividend yield stock,

The answer is both yes and no.

Here are 5 PSU stocks that pay the highest dividend.

The dividend yield column above is really fascinating. More than 6% dividend yield beats FD returns. Apart from this, if you look at the valuation, then all these shares are quite cheap.

I mean stocks like REC and Power Finance Corporation are available at P/E ratios of 2 or 3!

If I was offered this standalone data, I would definitely be a buyer. This is a no brainer.

But before you make a decision, look at the stock’s price performance over the past 5 years. I have ruled out 2020 due to covid.

dividend myth

From the table above, we see that if you had invested in Coal India in 2017, 2018, or even 2019, you would have been sitting on a loss of at least 15-20%. I am not even considering compounding.

Same is the case with the rest of the PSU shares.

While a dividend yield of 10% sounds very attractive and attracts retail investors, the bigger point is the loss of capital.

is it reallyfundamentally strong stock, In all these stocks, even if you assume a consistent dividend yield of 8-9%, a 15-20% loss of capital will destroy 8-10% of your capital.

It would be better if you invest in Nifty ETFs.

A lot of people also tell me that a P/E ratio of 2-3 doesn’t make any difference.

I partially agree, but if you look at the 5-year average P/E, these stocks have always traded at these valuations.

Unless there is a major change in the way these companies operate or if you are buying these stocks at the bottom of their earnings cycle, there is no way to get good capital appreciation.

If you had invested in Coal India 100-110, which was at the bottom, would have doubled your money.

But it was at the bottom of earnings when there was a global coal shortage and temporary demand-supply mismatch. It is a trading bet rather than an investment.

Coal India has consistently given negative returns in the last 3, 4, 5 and 7 years. Even after doubling from its 2020 low. It’s still less than what it was worth 3 years ago.

What should investors do?

The whole purpose of investing is to invest money in companies that have strong management growth potential and are available at reasonable valuations.

While valuation of PSUs has always been cheap, there is a reason behind it. Unless you can make decisions about things that are changing for the better, why invest in them?

Also there are a lot of PSU cyclical stocks. Stocks like NMDC are more of a trading bet and not an investment. This is due to volatility and volatility in its earnings and share price.

It is also wrong to paint all PSUs with the same brush. Some prefer PSUdefense stockWe have a strong runway ahead of us. However, these shares offer capital appreciation and do not provide high dividend returns.

The focus should be on buying good quality stocks which have good dividend yield.

My bet would be a combination of MNCs and non PSU stocks that offer decent growth. Some of these stocks are available below their long term average valuations and also offer dividend yields of 2-3%.

These stocks would be good picks.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

(This article is syndicated from) equitymaster.com,

first article