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Stock Analysis, IPO, Mutual Funds, Bonds & More

Falling dividend yields may dampen FPIs’ interest in Dalal Street

The dividend payout of the BSE 500 companies peaked out at 34 per cent in FY14

, ET Bureau|
Mar 12, 2019, 08.00 AM IST
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India Inc’s dividend yield has been shrinking gradually over the past 10 years following lower dividend payouts by companies relative to their profits. This poses risk of lower participation from long-term foreign investors in Indian equity market amid hardening interest rates globally.

The current dividend yield — the ratio of annual dividend to the current market price — of the BSE 500 companies is 1.5 per cent, the lowest among major developed and developing nations, according to Bloomberg data. Russia has the highest dividend yield of 5.7 per cent. The average dividend yield of the top 10 global markets by market capitalisation was 2.9 per cent.

Dividend payout of the Indian companies has been declining over the past four years given the lower dividend growth compared with the profit growth. In the past 15 years, net profit of the BSE 500 companies grew 10 per cent annually, while the aggregate dividend growth was 7 per cent. Consequently, the dividend payout ratio – dividend as a percentage of net profit -- of the BSE 500 companies dropped to 19.6 per cent in FY18, 27 per cent lower than the 15-year average of 27.1 per cent.

The lower dividend payout reduced the numerator of the dividend yield calculation, while better equity performance compared with other global equity indices increased the denominator thereby resulting in a lower ratio. In the past five years, the BSE 500 gained 85 per cent while barring Brazil, all major markets trailed Indian market’s performance.

The dividend payout of the BSE 500 companies peaked out at 34 per cent in FY14, and since then it has been moderating gradually.

Low dividend yield may impact the foreign portfolio investment amid the rising interest rate regime adopted by some of the global central banks. In times of a hardening interest rate regime, FPIs may not find it attractive to retain their stake in the stocks with expensive price-earnings, particularly in consumer discretionary and staples given the depressed dividend yield.
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