Why dividends can't be taken for granted

Rule: A high dividend yield acts as a floor and stops a stock from falling too low.

Exception: The dividend is paid out of a company's earnings. If its profits drop, the company may not be able to pay a high dividend, which would bring down the dividend yield and could cause the share price to fall.

15.4% is the expected profit growth of the Nifty companies in 2008-9 over the previous year. In 2006-7, the profit growth was 39.5%, which fell to 29.3% in 2007-8.

52 stocks, or more than 10% of the shares in the BSE 500 segment, had a dividend yield of more than 6% as on 20 April 2009.

Usually, companies with steady dividend records try and maintain the dividend payout ratios. However, the drop in corporate earnings in the past one year has led to slimmer payouts. The four companies listed below were among the top dividend yield stocks in 2008, but slippages in earnings brought their prices down.

How top dividend yield stocks fared in 2008-9

A dividend yield of above 5% is considered very good. If the stock price falls, the dividend yield goes up, making the stock more attractive for investors. However, despite the high dividend yields, the above stocks fell because their profits came down in 2008-9 and dividends were pared. Analysts expect corporates to report lower profits in the next three-four quarters and have downgraded their earnings estimates.

Investors should assess whether the dividend paid by a company is sustainable. A firm may pay a generous dividend because of a jump in extraordinary income, which may not be repeated the following year. Eicher Motors has been a top dividend yield stock because of a 250% special dividend in 2007-8.