Dogs of the Sensex

India Inc. continues to suffer from rising interest rates, high costs and policy paralysis and this is now also reflected in the dividend payouts of 2011-12 fiscal which declined w.r.t 2010-11 fiscal. The dividend payout numbers for all the Sensex constituents are out and reflects the somber mood prevailing in the Indian economy. The following table highlights the dividend payout data for 2010-11 and 2011-12 fiscal.

Highlights: 

a) The net dividend payout (interim and final) for 21 companies has increased from 2011 to 2012.

b) For 5 companies, the net dividend payouts for both the fiscals have been status-quo.

c) The dividend payout shrinks from 2011 to 2012 fiscal for 4 companies.

d) The negative shock came from Hero MotoCorp for which the dividend plummeted from 5250% in 10-11 fiscal to 2250% in 11-12 fiscal.

e) The positive surprise originated from TCS for which dividend increased from 1400% in 10-11 fiscal to 2500% in 11-12 fiscal.

f) The average dividend payout for 2010-11 fiscal stood at 432% and it decreased to 401% in 2011-12.

Assumption:

Current set of Sensex constituents is assumed for both the fiscals for smooth comparison.

Sensex – Dividend Yield:

The list below displays the top 10 dividend yields of Sensex as on EOD values of 13-Jun-12.

As can be seen from the above list, top 3 ranks in the list are occupied by PSUs and 4 PSUs make it to top 10. 2 Auto companies also make it to the top 10.

Amidst the volatile markets, stock picking is always a tough task and lot of stress is on a tendency of entering at low levels and exiting at high levels. This strategy is aimed for winning but on umpteenth occasions it often results in pains because of the simple reason that it is next impossible to time the markets.

In an effort to find a stock screening system, I came across a mechanical strategy that sounds easy as well as convenient. This strategy requires just an effort of two-three hours in a year. The name of the strategy is “Dogs of the Sensex”.

Dogs of the Sensex “Strategy”

Dogs of the Sensex is a replication of a very simplest “Dogs of the Dow” or “Dow 10” strategy introduced by Michael O'Higgins and John Downes in early 1990s. The strategy is aimed at investing in 10 highest dividend yields. Dividend Yield is a measure of dividing the latest annual dividends by the current stock price. A high dividend yield implies stocks whose prices have fallen and are available at favored prices for the investors.

The investments are done in top 10 dividend yields of Sensex for a period of one year. The portfolio is rebalanced after one year as per the latest dividend yields. It is a pure mechanical strategy which gets rid of all the research, patterns and subjective inputs involved in the stock screening activities.

A low dividend yield indicates an over-priced stock and a high dividend yield indicates an underpriced or beaten down stock. The beaten down stocks are the best candidates for upsurge in prices.

The strategy is pretty much in line with the fact that one would like to have a portfolio of companies with impressive dividends and beaten down prices (Sensex Sufferers). It is also supplemented with the combinations of stocks a.k.a blue-chips which has an impressive track record in the past and thus also are making it to the Sensex.

The companies listed out for fiscal 11-12 also coincidentally creates a diversified portfolio in the process with presence felt from all the major industries contributing to India Inc. story.

Performance of Dogs of the Sensex (Fiscal 10-11)

The top 10 dividend yield picks for fiscal 10-11 along with their respective Y-o-Y returns as on 13-Jun-2012 are as follows:

 Highlights:

 FMCG duo HUL and ITC secured the first and the second position for highest returns category.
 BHEL secured the top position for negative returns.
 60% of stocks ended up in advancing and 40% in declining categories.
 On comparison of lists of both the fiscals (10-11) and (11-12), there have been 3 new entries:
i) Coal India , ii) TCS and iii) ICICI Bank

The average returns of the pack were 2.20% on a year-on-year basis and it outperformed the benchmark (Sensex) by far which generated -7.59% returns in a similar time frame.

Assumptions for the strategy:

i) Hold and Sell of stocks after a day more than a year as it is considered as long-term capital gain (LTCG) and LTCG are not taxed at all. Any gains that you make by buying and selling stock(s) within a year’s time-frame is considered as short term capital gains and it is taxed at 10 per cent.

ii) This strategy also is not taking into account the transactional costs while the portfolio rebalancing exercise is carried out.

iii) A high dividend yield can also be either because of the stock is tremendously beaten down or it may have substantially increased dividends due to one-off reason (Asset sale, Capital Gain, Special Dividends)