Fixed deposits have been a preferred choice for passive income, offering stability and assured returns.
However, with interest rates typically ranging between 5% and 7%, FD returns often struggle to beat inflation. This is where dividend-paying stocks can offer an attractive alternative.
While equities carry market risks, carefully selected dividend stocks can create regular income and give capital appreciation.
In addition, dividend-paying stocks can also be used for portfolio diversification. They are seen as reliable & relatively safe bets during market corrections, providing stability.
The recent market correction has underscored the importance of holding fundamentally strong companies that continue to reward investors through steady payouts.
For investors seeking a balance between safety and growth, we have identified five dividend-paying stocks that can serve as a compelling alternative to fixed deposits.
Let’s take a closer look.
#1 Chennai Petroleum Corporation
First on the list is Chennai Petroleum Corporation.
Chennai Petroleum is a subsidiary of Indian Oil, which holds a majority stake of 51.9% in the company.
It currently operates 10.5 million metric tonnes per annum (MMTPA) refinery capacity.
The company manufactures petroleum products, lubricants and additives. In addition, it also produces high-quality feedstock such as propylene, superior kerosene, butylene, naphtha, paraffin wax, and sulfur.
It enjoys significant operating leverage due to its association with Indian Oil, which buys 90% of Chennai Petroleum’s output.
It’s a recent entrant into the dividend-paying stocks club, and its stellar financial and share price performance have contributed to its success.
The company has paid an average dividend of Rs 28 per share in the last three years with a dividend payout ratio of 14.5%.
In FY24, it paid a final dividend of Rs 55, which translates into a yield of 9.6%.
The company only announces a final dividend, so the FY25 dividend will be declared in a couple of months.
Looking ahead, the company is setting up a 9 MMTPA refinery project in a joint venture with the parent company IOCL, estimated to cost Rs 364.5 billion (bn).
With improving financial performance, the company’s annual cash generation is expected to be around Rs 10-15 bn. Thus, it will likely support consistent dividend payouts, making it attractive for income-focused investors.
#2 Hindustan Zinc
Last on the list is Hindustan Zinc.
Hindustan Zinc is India’s largest and the world’s second-largest integrated zinc producer. Its zinc operations control approximately 75% of India’s primary zinc market.
In addition, it ranks as the third-largest silver producer globally.
Hindustan Zinc has paid record dividends to shareholders in the last five years, with an average dividend of Rs 25.5 per share, with a dividend payout ratio of 113.2%.
It has declared dividends 38 times in the previous 20 years, with an average dividend of Rs 14.9 per share. In FY25 so far, it has paid a dividend of Rs 29 per share, which translates into a dividend yield of 6.5%.
Looking ahead, the company plans to diversify its zinc product offerings and boost sales contributions from silver as part of its growth strategy.
To this end, it is also looking to invest US$ 2.5 bn to double its annual production capacity to 2 million tonnes of zinc, lead, and silver.
Hindustan Zinc is a cash-rich company with cash and cash equivalents amounting to Rs 101.9 bn as of FY24. The company generates high free cash flows and is set to benefit from strong demand for zinc and silver in industrial applications.
#3 Bharat Petroleum Corporation
Next on the list is Bharat Petroleum Corporation.
Bharat Petroleum Corporation is a PSU that refines crude oil and markets petroleum products. The company is one of the three leading public oil market companies, with a market share of about 25.4% as of FY24.
BPCL also has the third-largest refining capacity, 35.3 MMTPA, which comprises about 14% of India’s total refining capacity.
It’s among the highest dividend-paying stocks in the Nifty 50, ranked based on the highest dividend yield. It has been paying dividends continuously since 2001 and has declared 41 dividends.
The company has paid an average dividend of Rs 29 per share in the last 5 years, with an average dividend yield of 6.9% and a payout ratio of 48.5%.
In FY24, it paid a dividend of Rs 15.5 per share with a payout ratio of 25%. This trend continued in FY25 as well, with a dividend of Rs 15.5 already paid with one quarter left, implying a yield of 5.7%.
Looking ahead, the company has planned significant medium-term capital expenditures. BPCL is expected to spend around Rs 160 bn in FY25 and Rs 180 bn in FY26 on the Bina project expansion.
In addition, BPCL’s expansion plans include expanding its marketing infrastructure, pipeline network, and entry into petrochemicals.
The company plans to invest in renewable energy projects as part of its long-term strategy. It aims to invest Rs 100 bn in the next two years and achieve 2 gigawatts (GW) of renewable capacity by FY24 and 10 GW by 2030-35.
With a cash-rich balance sheet, a cash balance of Rs 23 bn, and the ability to generate free cash every year, BPCL’s dividend trajectory is expected to continue.
#4 Indian Oil Corporation
Next on the list is Indian Oil Corporation.
Indian Oil (IOC) is India’s largest oil marketing company (OMC) and third-largest oil and gas company.
It operates 11 of India’s 23 refineries, collectively holding a refining capacity of 80.7 MTPA. It has a global presence in over 70 countries.
As a government-owned entity, the company has a rich legacy of paying consistent dividends and increasing them. It has declared 39 dividends since 2001.
Moreover, over the last 5 years, IOC has averaged a dividend payout of 87% and an average dividend of Rs 8 per share.
It paid a total dividend of Rs 11.7 per share in FY24. The dividend payout ratio for the year was 38.3%.
In FY25 so far, the company has paid a dividend of Rs 7 per share, translating it into a dividend yield of 5.5%. With one quarter to go, the company yield can be an alternative to fixed deposits.
Looking ahead, IOC has an aggressive capital expansion plan. Over the decade, it aims to invest over Rs 2 trillion (tn) to expand refining capacity, petrochemical integration, associated infrastructure, and renewable energy assets.
To this end IOC is investing over Rs 210 bn to expand the Barauni refinery in Bihar and Rs 56 bn to set up a city gas distribution network across the state. These investments are part of IOC’s aim of becoming a US$ 1 tn company by 2047.
The company has also invested Rs 720 bn to increase its refining capacity by 25% to 88 MMTPA. This capacity will start contributing to profits from FY27.
The company has a strong balance sheet with cash and cash equivalents of Rs 31.6 bn. Its future growth plans are expected to drive consistent free cash flow generation. This should support sustained dividend payouts in the coming years.
#5 Coal India
Next on the list is Coal India.
Coal India, the world’s largest coal producer, meets 80% of India’s coal demand.
It operates 84 mining areas in eight states through seven wholly owned subsidiaries and a mine planning and consultancy company.
This company is one of the preferred investment options for investors seeking consistent dividends. As a government-owned entity, it has consistently paid dividends since its listing in 2010.
In addition, over the last five years, it has distributed 54.3% of its net income, maintaining an average dividend of Rs 19 per share.
In FY25, so far, Coal India has paid a dividend of Rs 21.3, translating into a dividend yield of 5.5%.
The yield can surpass the fixed deposit return, with the final dividend expected to be announced during the fourth quarter results.
The company’s financial performance has been healthy, with sales and profit growing at a compounded annual growth rate (CAGR) of 8.4% and 16.4%, respectively, during the last five years.
It’s cash-rich, generating high free cash flow, with cash and equivalents at Rs 53.5 bn at the end of FY24.
Coal remains a vital energy source, fulfilling 55% of India’s energy requirements. Due to rising power demand, coal demand is anticipated to stay strong.
In addition, the company is expanding into the renewable energy sector, as coal demand is expected to peak around 2030. To fuel growth, it also invests in coking coal washeries and coal gasification.
Conclusion
On the other hand, dividend-paying stocks provide an opportunity to generate passive income with the added benefit of capital appreciation.
While equities carry risk, carefully chosen dividend stocks with strong financials and consistent payouts can be an alternative to fixed deposits.
The stocks highlighted in this article not only provide steady dividends but also have the potential for long-term growth. With robust cash flows, strong business fundamentals, and attractive dividend yields, they can build a reliable passive income stream.
However, as with any investment, to make informed decisions, it’s crucial to assess the company’s fundamentals, including its financial performance, corporate governance practices, and growth prospects, rather than relying solely on the hype.
Happy Investing.
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