The rally in bonds after demonetisation has had a rarely seen effect on certain PSU stocks with their dividend yields moving beyond the sovereign yields. The 12-month forward dividend yields of the state-owned Coal India and Rural Electrification Corporation (REC) have surpassed the benchmark yield of 6.2%.
For instance, the dividend yield of Coal India is currently 43 bps more than the 6.2% one gets by investing in the 10 year bench mark and the other state-owned firm REC also commands a projected 12 month dividend yield of 6.4 %, data compiled from Bloomberg revealed.
While dividend yields of blue chip stocks being higher than the yield on the benchmark bond is not uncommon in bear markets, this is probably a rare instance of it when equities are barely 10% below life time highs.
The cash-rich Coal India, which dolled out more than its profit as dividend in the last five years, gave away R17,306.84 cr in FY16 to the investors- the highest in absolute terms by any Indian listed company.
Given the PSUs are conventionally high dividend payers, state-owned companies account nearly a third of 40 companies in CNX 200 index which boast a higher dividend yield than that of Nifty 50. As the analysts forecast a drop of 11 bps in the Nifty 12 month yield against the last four quarters, the spike in yield of Coal India has made it more attractive to the investors. The one year projected dividend yield for the gauge stood 1.4% on Tuesday, Bloomberg data showed.
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REC, on the other hand, distributed nearly a quarter of its profit as dividend in the last five years. The infrastructure finance company distributed 171% of equity as dividend in FY16 against 107% in corresponding previous year.
Market participants pointed out, as the spread between the yield on 10-year government bond and Nifty’s dividend yield contracting to a multi year lows, investing in equity has become more attractive given a significant consideration that money managers give when they allocate their funds between equity and debt.