As investors buy dividend-yielding stocks, analysts advise otherwise

Say buying stocks cum-dividends unwise, especially before results.

Kazim Alam July 16, 2013
Analysts believe that purchasing the stock when it becomes ex-dividend is actually wiser because it allows investors to buy the stock not only at a lower price but also without incurring taxes. PHOTO: FILE

KARACHI: With the result season just around the corner, investors have started calling up their brokers to know which stocks are likely to produce high dividend yields. They want to buy those stocks that will give them dividends, which are basically a measure of how much cash flow an investor is getting for each dollar, or in our case rupee, invested in equities.

But is it really wise to pile up “cum-dividend” stocks just before the result season? A stock is cum-dividend when its buyer is entitled to receive a dividend that has not yet been paid. “Theoretically, the expected amount of dividend is accounted for in the price of a security at which it trades just before the result announcement,” said Asad I Siddiqui, analyst at Topline Securities, while speaking to The Express Tribune on Tuesday.

“But investors accumulate shares that can offer a higher dividend payout to hedge against future risks. If the dividend is higher than the market expectation, the share price appreciates, eventually benefitting the investor,” Siddiqui added.

Keeping in view its investors’ enquiries about stocks with high dividend yields, Topline Securities issued a research note on Tuesday that highlighted five stocks, which are likely to announce higher dividends. “We have considered firms having fourth quarter fiscal year 2012-13 (or second quarter calendar year 2013) dividend yield of 5% or more as high dividend-yielding stock,” it said. Three out of the five companies belong to the Attock Group, which is known for its ‘bumper dividends’.

Dividend yield shows how much a company pays out in dividends every year as a percentage of its market price per share. It is calculated by dividing the annual dividend per share by the stock’s per-share price.

Attock Petroleum (APL) tops the list with the expected dividend of 8% for the latest quarter. “APL having paid Rs50 and Rs41.5 in previous two fiscal years, respectively, has a history of making one and final bumper payout,” it said while referring to the fact that company pays dividend only at the end of a fiscal year. The brokerage house expects the company to pay Rs45 per share cash dividend in its upcoming result announcement.

Topline Securities estimates that the dividend yield of National Refinery Limited – which has paid only final dividend at the end of a fiscal cycle in recent years – will be 6% for the latest quarter, as it is expected to pay cash dividend of Rs15 per share.

Similarly, Hub Power Company (Hubco) is likely to pay Rs4 per share dividend with its June result, the brokerage house estimates. Pakistan Oilfields (POL), which has historically paid higher dividends in the second half, is expected to announce Rs30 per share as final cash dividend.

The last name on Topline Securities’ list of stocks offering high dividend yield is Nishat Mills. Backed by 57% earnings growth, the company is likely to pay a cash dividend of Rs5.5 per share, which translates into a dividend yield of 5%.

Besides, the fact that a company’s stock price comes down on the ex-dividend date by roughly the amount of the dividend announced, another reason why investors should not buy a stock just before the dividend announcement only to sell right afterwards is that they result in a tax liability in most cases.

Therefore, analysts believe that purchasing the stock when it becomes ex-dividend is actually wiser because it allows investors to buy the stock not only at a lower price but also without incurring taxes.

Published in The Express Tribune, July 17th, 2013.

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