Tips to select highest dividend paying stocks & best companies paying high dividend

Dividends have always been a prominent investment theme for investors. Besides offering an attractive income stream, they also provide exposure to potential share price gains.However, investors should be mindful that the mere fact of a company paying a high dividend does not make it a good investment. What they should be looking for is not just an above average dividend yield, but also a high quality and sustainable dividend.

Highest dividend paying companies’ stocks

Dividends have always been a prominent investment theme for investors. Besides offering an attractive income stream, they have an added benefit of providing exposure to potential share price gains. Dividends are also considered to be more stable than earnings. This is mainly because companies are usually reluctant to cut dividends even when their business outlook worsens, believing that such a move would signal that their businesses is in decline.

A rational investor normally prefers 'value investing', which is an investment strategy that attempts to select stocks that trade for less than the intrinsic/fair values. And out of many components of value investing such as price to earnings, price to book, selecting companies based on their dividends has proved to be successful. This dividend based approach has fared well recently, especially compared to other components of value investing, which performed poorly last year. As an example, for 2011, high dividend yielding stocks outperformed the European market by 7.8%.

However, despite all the positively surrounding dividend based stock selection, investors should be mindful that the mere fact of a company paying a high dividend does not make it a good investment. What they should be looking for is not just an above average dividend yield, but also a high quality and sustainable dividend. Stock picking exercise should be done seeking companies with sound fundamentals that offer some dividend growth and one with sufficient earnings potential. Many such companies can be found in defensive sectors such as tobacco, pharmaceuticals, telecoms, utilities, and tend to be larger caps.

Things to keep in mind before choosing dividend paying stock

While choosing a value stock is a tough task, investors should always be careful while building their portfolio. In compiling the list of stocks, one must not just focus on the dividend payout ratio, but also on other key financial ratios to ensure that the company is sound and safe, and has good growth prospects. Here are some of the factors to consider for high dividend paying shares:

1. Dividend payout ratio of at least 30%. This is the ratio of dividend distributed by the company to the total amount of profit after tax earned.

2. Market capitalization of 500 crore plus

3. Interest cover of 3 or above

4. ROE of 15% or above

5. Qualitative factors which focus on future growth and prospects for the company.

Some of the stocks that I can think of which qualify on all parameters are: Hindustan Unilever, Godrej consumer products Ltd, HCL technologies, among others.

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