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Suresh Krishnamurthy

Investors may be turned off by the look of the stocks in a portfolio of dividend dogs because of the small-cap bias. The strategy, however, demands blind faith and investors unwilling to do so could build a portfolio of their own by using their subjective judgment.

THAT a strategy based on high-dividend yielding stocks can deliver superior returns may be comforting (see accompanying story), though it is not clear if investors would like the look of a portfolio of high-dividend yielding stocks.

Consider the top ten dividend yielding stocks in the CNX-500 Index: PNB Gilts, First Leasing, SREI International Finance, Chambal Fertilisers, ICI, Bongaigaon Refineries, Cosmo Films, Kochi Refineries, Canfin Homes and GHCL.

The list contains as many as four non-banking finance companies. Two of them — PNB Gilts and Canfin Homes — have been having a tough time recently. The case for some of the other stocks, such as Cosmo Films (affected by crude oil prices) and ICI (delivering higher dividends by selling assets) is also not comforting.

Would this portfolio deliver returns for me, is the question most likely to be asked. Some may even be quite wary of the prospect of investing in this set of stocks. The strategy demands, however, that investors need to set aside such fears and put their money in blindly. Alternatively, they can build a portfolio using subjective judgment.

Comforting past: Investors who are put off by the look of the portfolio, however, need to consider the record of investing using such a strategy. In the past too, the strategy demanded investment in stocks such as Apple Credit, Apple Finance, Garden Silk, Maars Software, Tourism Finance, RPG Cables and Kothari Products. But even with stocks of this genre, the strategy paid off.

Moreover, stocks such as Garden Silk, Maars Software, RPG Cables, Tourism Finance and Kothari Products did deliver returns.

Between September 2000 and September 2001, Garden Silk delivered a total return of about 120 per cent. The dividend yield also seems to protect the value of these stocks from a sharp downside.

A sum of Rs 5,000 is enough to build a portfolio of these stocks. It would involve buying between three shares of ICI and Kochi Refineries to 25 shares of PNB Gilts and SREI International Finance. That is expected to fetch you dividends of about Rs 375 or 7.5 per cent. The change in share price would add or detract from this yield.

Alternative portfolio: There is the opportunity of using subjective judgment to pick stocks too. For instance, you can pick commodity stocks that are facing a favourable operating environment.

In addition, as the intention is to reduce risk, the portfolio may be equally divided into small-cap, mid-cap and large-cap stocks. The following is one of the alternatives:

Small-cap: City Union Bank, Bajaj Auto Finance, Infomedia India, Sirpur Paper and Vardhman Polytex. The dividend yield of these stocks ranges between 6.2 and 6.7 per cent.

Mid-cap: Chambal Fertilisers, ICI India, Bongaigaon Refineries, Kochi Refineries and Bank of India. The dividend yield ranges between 6.5 and 7.4 per cent.

Large-cap: HPCL, Hindustan Lever, Indian Oil, BPCL and Hero Honda. The dividend yield ranges between 4.5 and 5 per cent.

If you put Rs 15,000, with Rs 1,000 invested in each stock, into this portfolio, you would receive dividends of about Rs 900. The dividend yield works out to 6 per cent.

Risks exist: There are, however, risks involved in such a strategy.

The most important, of course, is the non-receipt of dividends. The risk is especially high for the CNX 500 portfolio. That can pull down returns considerably.

If after analysing these stocks you think that the risk of non-receipt of dividends is low, you can put your money in such a portfolio.

Do not invest in this portfolio for regular income. If you want regular income, you should stay clear of small-cap stocks. This is because investors requiring regular income are usually those who cannot afford to take higher risks.

For such investors, it may also be appropriate to stick to the large-cap dividend plays depending on their needs and objectives.

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