Generally, high dividend-paying stocks are not considered to be very good for capital appreciation, primarily due to a gravitating effect on the stock price on account of dividend adjustments.
On the fundamental level, if a company pays a lot of dividends, then its potential to capitalize on the future growth prospect due to less cash also minimizes. However, there are a few undervalued stocks as well, that can give both capital gains over a long period of time with consistent dividends.
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I have used the InvestingPro+ Screener to select some good quality dividend stocks (Refer to the link at the bottom on how to do it). Now, I’ve sorted the list of all stocks that have passed my criterion on the basis of their fair value which gives me stocks that have the highest potential for capital appreciation.
For example, one stock that came on the screener is Oil India Limited (NS:OILI). It is an oil and gas exploration company with a market capitalization of INR 34,684 crore. The stock trades at a very healthy dividend yield of 7.82%, but that’s not all.
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As can be seen from the image above, the fair value of the stock is INR 432.9, depicting a probable upside of 30.2% from the CMP of INR 332.8. This fair value has been calculated by taking the average of 10 different financial models which helps to arrive at a more realistic fair value by removing the extreme-end valuations (both on the lower and higher side).
Image Source: InvestingPro+
Another stock that was on the screener was Coal India Limited (NS:COAL) which is a well-known coal-producing firm with a market capitalization of INR 1,92,277 crore. The stock is giving a dividend of 7.8% which makes it a good candidate for a dividend portfolio. But those who are also looking for some capital gains can have a look at its fair value which is INR 398.2, projecting an upside potential of 26.7% from the CMP of INR 314. This is based on the average of 15 complex financial models. In fact, Coal India has already delivered a 36% return since September 2023.
All in all, Oil India and Coal India are two undervalued and high dividend-paying stocks that I would consider for my dividend portfolio that should also hold the potential to give me good capital gains.
Read More: InvestingPro+: How to Select High-Quality Dividend Stocks?
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This has been covered in my previous webinar on 11 October 2023. You can access the recording here: https://t.co/zc2JJK65DK
Remember, the massive offer of a 65% discount on InvestingPro+ via the coupon code PROW265 is only valid till 25 October 2023. Here's the link to apply the code: https://t.co/XKUqgnDlxf
For any assistance reach me out at aayush.k@investing.com or on X (formerly, Twitter) - aayushxkhanna