No one expected 2022 to be an easy year for the stock markets but the recent bloodbath has caught a lot of investors off-guard.
Stocks, bonds and other assets are getting hammered this year as investors are left wondering if the US is headed toward recession and its impact on their portfolios.
Investors are forced to watch their investments they meant for retirement or their child’s wedding or education dwindle day after day.
It’s a rock and a hard place scenario. Invest in low yielding bonds and fixed deposits or dare to buy stocks and stay invested in equity.
Abysmal interest rates on fixed deposits and bonds since the last few years has forced investors, even senior citizens, to rely on riskier assets for growth such as equities.
And the equity markets hadn’t disappointed…until now.
But now everything suddenly seems to be going wrong. We have rising interest rates and slowing growth. Then there is high inflation, a wobbling Chinese economy, and a war in Ukraine that has shocked commodity markets.
Anxious investors like my father want to sell or partially reduce their equity holdings and sit on cash or invest in fixed deposits but are concerned that inflation will eat away their capital.
On the other hand, the FOMO (fear of missing out) factor makes investors wonder if they should buy on dips or continue to stay invested in stocks.
So, what is an investor to do?
The problem with this question is not that it can’t be answered, but that it should not be asked.
No one can predict the markets or the future. Rather, in such uncertain times one should look at an investment that can provide a steady stream of income as well as grow your capital.
But is there an investment that can generate regular income in addition to capital gains?
Fortunately there is… and it is called a “Dividend Aristocrat”.
A dividend aristocrat is a company in the S&P 500 index that not only consistently pays a dividend to shareholders but annually increases the size of its pay-out.
Fundamentally strong high dividend yielding stocks have historically presented growth opportunities even during bear markets and periods of uncertainty in equity markets.
During the last couple of bear markets in India, dividend stocks outperformed the BSE as well as the broader market indices most of the time.
Naturally when it comes to high dividend payers, most of us think of old economy sectors like utilities, FMCG, and Oil & Gas.
Stocks like ITC, BPCL, Coal India, Vedanta, and NHPC often crop up when searching for high dividend yielding stocks…
But I didn’t want to look at just any dividend paying stock.
For the sake of hundreds of thousands of investors just like my father who are currently facing this dilemma of where to park their hard-earned money, I set out on a quest to find the best of the best.
For a stock to qualify, it had to meet five parameters:
· A fundamentally sound company
· Good growth prospects and high ROE
· Stock is fairly undervalued
· A multiyear track record of paying phenomenal dividend pay-outs
· Stocks that have consistently grown their dividends over the last 20 years
My research discovered a surprising list of stocks which have rewarded investors handsomely over the years and fit into the criteria as per my parameters.
In this article, we take a look at the first stock on my list – an IT stock – that has not only paid high dividends consistently over the last twenty years but has also continuously increased pay-outs over the years.
This IT Company’s Dividend Growth Rate Beat Nifty’s 20-year Annual Returns!
When we think about IT & Software stocks, the first company that comes to mind is TCS or Infosys or perhaps Wipro or even HCL Technologies.
After all, these “Big 4″ IT companies have emerged as consistent wealth creators for millions of investors over the last few decades.
But 2022 has been an unforgiving year for IT stocks as shares of most companies in this sector have emerged among the major losers of the year so far.
The BSE IT index has lost 25.69% in 2022. In comparison, the 30-stock Sensex has declined 10.70% during the period.
This is primarily driven by fears that as the US economy tips into recession, IT stocks will be hit hard as America contributes nearly 50% of revenues for the big four – TCS, Infosys, Wipro, and HCL Technologies.
So why are we looking at an IT stock in this scenario of gloom and doom?
Simply because stocks that pay high dividends tend to do a lot better during depressed markets.
And as the value of these IT stocks have declined by over a quarter, a high dividend paying company behind the stock should still continue paying a dividend which would mean the dividend yield would only rise further.
So which company is it?
The number one company on our list of Dividend Aristocrats is Oracle Financial Services Software Ltd (OFSS).
Oracle Financial Services Software Ltd (OFSS) is a subsidiary of Oracle Corporation, US and is a world leader in providing IT solutions to the financial services industry. Over the last 20 years, the NIFTY’s annualised return stands at 14.3 percent whereas the annualised dividend growth rate for OFSS is at an unbelievable 28.5 percent!
Picture this. In 2002, OFSS paid a dividend of ₹1.25 per share. In 2022, the dividend amount was astonishingly higher at ₹190 per share!
But what about yields, you might ask?
Let us look at dividend yields for the last 3 years based on the weighted average price of the stock during that year.
That works out to an average dividend yield of 5.93% and we are not even considering the capital appreciation over time.
Compare this to fixed deposit rates of leading banks such as SBI and HDFC that average around 5.2% for a 1-year deposit and it’s a no brainer…
Investing in high dividend yielding stocks such as OFSS might definitely be worth a look for investors.
Not just a Dividend Stock…
As we just saw, when it comes to dividend pay-outs and high yields, OFSS stands head and shoulders above any other company.
But how does OFSS fare based on the other parameters?
Let us take a brief look at each criteria.
OFSS: A Fundamentally Solid Company with Strong Parentage
When investing in a company, prudent investors must look for established promoters and a strong parentage.
Well, OFSS surely checks that box being a majority owned subsidiary of Oracle Corporation, an American multinational computer technology corporation.
Oracle is the third-largest software company in the world by revenue and market capitalisation.
As on 31 March, 2022 the promoter holding in OFSS stood at 73.11%
Oracle Financial Services Software Ltd operates in over 160 countries with a customer base close to 1,500 across business areas of corporate and retail banking, risk and finance and financial crime.
Good growth prospects and High ROE
In recent years, OFSS has made significant investments in rapidly moving its solutions to cloud and launched solutions for Liquidity Management, Virtual Account Management, and Supply Chain Finance as cloud services, much ahead of its peers.
Banking and financial services companies are investing in cloud migration,
development of new software products for digital banking, enhancing features and functionalities in existing products, data, analytics and cybersecurity.
The pace of investment by financial services companies in digital capabilities is expected to continue over the coming years.
The company expects to see continued broad based demand across its product lines with their ongoing investments in building organic SAAS solutions starting to bear fruit in recent quarters.
The global core banking software market is projected to grow from US$ 10.84 bn in 2021 to US$ 34.48 bn in 2028 at a CAGR of 18.0% in the forecast period.
As the current penetration of Core Banking Solution (CBS) is at only 18% there is huge scope for companies catering to this increasing demand. This is likely to drive revenue growth for OFSS going forward.
The company signed license deals of ₹2,240 m during the March quarter with customers in 35 countries.
OFSS’ net margins have consistently improved from 26% in FY 2018 to 46.5% in FY 2022.
The company is almost debt free and has a net worth of ₹71 bn as on 31 March, 2022.
OFSS is Fairly Undervalued
For comparison purposes, we have considered five other companies from the IT and software services sector within a similar range of revenues and profits.
Starting off with the P/E, Oracle Financial Services Software Ltd trades at a much lower P/E as compared to its peers.
OFSS scores again on another metric. It has the lowest P/B ratio at 4.55 as compared to the average PB of 8.79 for its peer group.
If we look at the ROE (Return on Equity), OFSS leads again with the highest ROE at 31.21 indicating that the company is managing its shareholders’ capital well.
Finally, let us look at the price to dividend ratio which is often overlooked as investors usually look at P/E and other metrics.
The price to dividend ratio accounts for cash flows and is a more trustworthy ratio as cash is actually being paid out which means the company is actually making money.
At 16.10, OFSS has a significantly lower price to dividend ratio as compared to its peers.
Effectively, this ratio also indicates how many years it will take for dividends to yield the original share price. If an investor invests for dividends, this is a useful metric.
Why You Should Consider Dividend Aristocrats in 2022
During bull markets when stock prices in general are rising, both growth-stock investors and dividend investors make money.
During bear markets when stock prices in general are falling, dividend investors seem to do better than growth-stock investors.
One of the best things about dividend aristocrats is that they’ve shown that no matter what’s going on in the broader markets, their business is fundamentally sound enough to withstand down periods.
With companies like these, investors are rewarded regardless of movements in stock prices.
If you’re a long-term investor, even if stock prices fall further, those unrealised losses wouldn’t faze you much as when the price goes back up to what you purchased it for, those dividends become pure profit.
When the price of high-quality dividend stocks falls to the point where the dividend yield is historically attractive, seasoned investors tend to accumulate the stock.
This generally halts any further decline, stabilises the price and over time the stock reverses its trend. As the stock shows a reversal, other investors start buying which pushes the price higher.
Prudent investors should consider such high dividend stocks as they are less risky in the current environment.
You can use dividends to create a passive, predictable, and growing income that you can rely on whether the market moves up or down.
Dividend Aristocrats aren’t just for senior citizens and retirees. They can be part of a lucrative investing strategy in times like these.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com