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Dividend Paying Stocks

 High-dividend stocks are normally good investments. However, this may not be true in the current situation. The Budget proposal to tax dividends exceeding `10 lakh in a year has led to a flurry of dividend announcements by companies. Many companies want to pay out hefty dividends before the proposal becomes a rule in 2016-17. But experts say that the dividend yield alone should not make you buy a stock. The dividend payout and the dividend coverage ratios are better indicators than just the dividend yield of a stock.

High dividend stocks assure stable returns even in a volatile market. However, companies declaring very high dividends from their profits are best avoided since they might not retain enough profits to invest in future growth and expansion plans. This, in turn, would limit the upside of stock prices. Companies that have unstable dividend policies are also unreliable since they may be declaring one-time dividends to gain investor interest.

Others say that one should not lose sight of fundamentals. Buy a stock based on its fundamentals and other qualitative factors. The price to earnings (PE) ratio is a good indicator of its value. Patil says one should also look at the price to book value (P BV) and price to sales (PS) ratios for comparison. A lower PBV signifies that the company is fundamentally weak. On the other hand, a lower PS ratio indicates that the stock is undervalued. Further, return on equity (ROE) indicates the amount of profit the company has generated with the shareholders' funds.

 

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