Synopsis:
In spite of market risks, this report contrasts dividend-paying stocks with fixed deposits, emphasizing how some dividend stocks have continuously outperformed both FDs and inflation, making them better choices for building long-term stable wealth.
Stock market investing carries risks, but it frequently yields higher returns than traditional saving strategies. However, bank fixed deposits (FDs) and recurring deposits (RDs) are regarded as mostly safe, typically sufficient to beat inflation. In fact, dividend-paying stocks offer returns that exceed interest rates from FDs and even surpass the inflation rate. So, which is a better option: bank FDs or dividend-paying stocks? Let’s examine it more closely.
Returns on Fixed Deposits
Fixed Deposits (FDs) are one of the safest investment options offered by most banks in India, They pay a set interest rate on your investment, which is currently around 5 to 9 percent, depending upon the bank and the time period. At the time of maturity, you receive both the initial amount and the interest amount. But FDs are also not always safe, as there still exists a risk of default, lock-in period, and liquidity issues, where you might lose an opportunity and many more.
However, the real returns on FDs are relatively low when compared to inflation, which is currently at about 3 to 4.5 percent. This implies that although your money is secure, its real value doesn’t increase that much. The best candidates for FDs are risk-averse investors seeking stable and assured returns.
Return on Dividend Stock
Dividend yield is a percentage of a company’s current share price that represents the return you receive from dividends. It displays the potential amount of consistent income that a stock could produce if its dividend stays constant.
Depending on the company, dividend yields usually fall between 3 percent to 10 percent. These returns can fluctuate according to the company’s earnings, market situations, and the overall economic conditions.
In this, your total return is calculated by adding the dividend income received throughout the year to capital appreciation in the form of changes in the stock price of the company over the period of time. This total return can beat inflation and can even increase your wealth.
Though this may sound good, where you’ll receive a dividend as well as capital gains, there is a risk of volatility in share price due to global events, a dip in earnings, negative investor sentiment, which could wipe out your gains as well as your capital.
Below are some of the stocks that have given higher returns than the inflation and the FD interest rates:
Established in 1975, Coal India Ltd (CIL) is the world’s largest coal producer and a major employer with over 2.2 lakh employees. Operating across 85 mining areas in eight Indian states, it manages 310 mines, including underground, opencast, and mixed types. CIL also runs various training centers and owns 14 subsidiaries and has several joint ventures focused on coal mining, renewable energy, and coal gasification.
Coal India Ltd has a market value of Rs. 2,33,537 crores and is priced at Rs. 378.95. It has a P/E of 7.08x, which is lower as compared to industry P/E of 11.9x. With a debt-to-equity ratio of 0.09 and an ROCE of 38 percent, the company exhibits low leverage.
It has performed well over the past five years, with a sales CAGR of 8 percent, and a profit CAGR of 16 percent. Its operational strength and profitability are indicated by its 38.8 percent ROE. The company has a dividend yield of 6.97 percent and has shown a price CAGR of 24 percent in the past 5 years.
Vedanta Ltd. is a multinational natural resources corporation that produces oil and gas and mines. It produces important commodities like zinc, copper, aluminum, and iron ore and operates in a number of nations, including South Africa, India, and the United Arab Emirates.
With a market valuation of Rs. 1,68,635 crores, Vedanta ltd is trading at Rs. 431. It has a price-to-earnings ratio of 12.6x, which is lower than the industry average of 40.2x. The business’s return on equity (ROE) of 38.5 percent and return on capital employed (ROCE) of 25.3 percent showed effective use of capital. The company’s sales CAGR over the last five years has been 13 percent.
The company has a dividend yield of 10 percent and has shown a price CAGR of 33 percent over the past five years. Even though all the other aspects of the company are good, the company has debt of Rs. 91,479 crores, with a D/E ratio of 2.22, which can be a major concern to the investor.
Founded in 1952, Bharat Petroleum Corporation Limited (BPCL) is a Government of India company that refines crude oil and sells petroleum products. In addition to LPG bottling and lube blending facilities throughout India, it runs refineries in Mumbai and Kochi. BPCL has a wide marketing network that includes depots, retail stores, aviation fuel stations, and LPG distributors.
Bharat Petroleum Corporation Ltd has a market value of Rs. 1,38,463 crores and is priced at Rs. 319. It has a P/E of 10.2x which is lower as compared to industry P/E of 21.4x. With a debt-to-equity ratio of 0.75 and a ROCE of 16.2 percent, the company indicates low leverage.
It has performed well over the past five years, with a sales CAGR of 9 percent, and a profit CAGR of 25 percent. Its operational strength and profitability are demonstrated by its 17.3 percent ROE. It has a dividend yield of 3.13 percent and has shown a price CAGR of 9 percent in the past 5 years.
The largest producer of iron ore in India and a major player in the mining industry, NMDC Ltd. was founded in 1958 and has its headquarters in Hyderabad. Operating several mines throughout India, it has established itself as a world leader in responsible mining and is renowned for its advanced mining technologies, robust exploration efforts, and community development contributions.
With a market valuation of Rs. 62,387 crores, NMDC Ltd is trading at Rs. 71. It has a price-to-earnings ratio of 9.59x, which is marginally lower than the industry average of 18.5x, which indicates a fair valuation. The business’s return on equity (ROE) of 23.6 percent and return on capital employed (ROCE) of 29.6 percent showed effective use of capital.
The company’s sales CAGR over the last five years has been 15 percent and profit CAGR has been 13 percent. It has a dividend yield of 4.72 percent and has shown a price CAGR of 26 percent over the past five years.
GAIL (India) Ltd is a government-owned integrated natural gas company that was founded in 1984. It runs 2,300 km of LPG pipelines, more than 11,500 km of natural gas pipelines, a number of LPG processing facilities, and a petrochemical plant. In addition, GAIL manages city gas distribution projects and owns shares in significant joint ventures like Petronet LNG and Ratnagiri Gas.
GAIL ( India Ltd) has a market value of Rs. 1,12,599 crores and is priced at Rs. 171. It has a P/E of 11.6x, which is slightly lower as compared to industry P/E of 13.3x. With a debt-to-equity ratio of 0.25 and an ROCE of 14 percent, the company indicates low leverage.
Over the past five years, it has delivered a sales CAGR of 14 percent, and a profit CAGR of 2 percent. Its operational strength is demonstrated by its 13 percent ROE. It has a dividend yield of 4.39 percent and has shown a price CAGR of 22 percent in the past 5 years.
Conclusion
Both dividend-paying stocks and fixed deposits (FDs) have advantages and disadvantages. FDs are a good choice if you want safety and guaranteed returns with minimal oversight. However, investing in dividend-paying stocks can help you increase your wealth over time if you’re looking for higher returns and don’t mind taking on some risk. Your risk tolerance and financial objectives will determine which option is best for you.
Written by Akshay Sanghavi
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