Given attractive valuations, high dividend-yield firms with good prospects and sound balance sheet can generate handsome returns.

The 14-17 per cent correction in the broader as well as mid-cap indices over the past six months offers investors a chance to accumulate companies with good fundamentals and attractive valuations. In addition, many among these offer a bonus of a good dividend yield. Analysts and market experts advise investors to accumulate select scrips that offer growth, value and high dividend yields.

“In the current scenario, investing in dividend-yield stocks with sound growth prospects could be a good strategy, not just from a one-year perspective but also over the longerterm. This will help generate good returns," says Ramanathan K, chief investment officer of ING Investment Management.

However, investors should be careful while shortlisting these stocks. “Dividend plays a significant role when it comes to equity investments. However, while selecting the dividend paying or high yield stocks, investors should keep an eye on the history of the payments, growth in business, earnings power and ability to maintain the dividend and, last but not the least, valuations," says Chetan Parikh, director, Jeetay Investments.

Here is a list of four companies which not only offer good dividend yield but have sound business fundamentals and earnings profile. Besides, they also offer good margins, better returns on capital and a robust balance sheet.

NIIT TECHNOLOGY
This information technology solutions company, predominantly in the BFSI (banking, financial services and insurance) and travel and transport verticals has a good record of dividend payments. Its business prospects also look bright. “The management is expecting revenue growth of 22-25 per cent, with operating margins of 17-18 per cent, which means net profit this year should grow at about 20 per cent," says Vishal Jajoo, who tracks the company at Nirmal Bang Securities. Analysts believe growth will come from remote infrastructure management services, along with higher traction in the travel and tourism verticals. Its high margin business, strong return on equity at 24 per cent and low leverage are key strengths. The stock is trading at 5.6 times its 2012-13 estimated earnings and offers 4.3 per cent dividend yield — reasonable, given the business profile and growth.

INDIA OIL CORPORATION
India’s largest oil refining and marketing company offers a dividend yield of 4.1 per cent dividend and is available at eight times its 2012-13 estimated earnings. Besides valuations, annual earnings growth over the next two years at 14 per cent is also par for the course. The company will be the key beneficiary of a decontrol of retail fuel prices, particularly diesel. Besides, its expansion of the Panipat refinery and the setting up of an integrated refinery or petrochem complex at Paradip would drive future growth. Moreover, its constant dividend payment history, good returns on equity at 14.2 per cent and less leverage makes it a good pick.
 

CASTROL INDIA
Castrol is a known brand and the second largest company, with 22 per cent market share, in the domestic lubricant industry. It has not only been consistent in revenue and profit growth in the past but has a good dividend paying record as well. Further, it is a zero-debt company and generates large cash flow. In calendar year 2010, it generated Rs 525 crore operating cash flow, of which Rs 421 crore was paid back in the form of dividend. It generates 140 per cent return on capital and 90 per cent return on equity. The stock is trading at 19 times its estimated calendar year 2012 earnings and offers 3.1 per cent dividend yield. Good, considering the management expects its earnings to grow at 15-20 per cent annually over the next five years.

ENGINEERS INDIA
Engineers India is a leading player in the hydrocarbon segment, providing engineering services for refining, petrochemicals, offshore oil & gas, pipelines, fertilisers, etc. It has been a key beneficiary of investments in the hydrocarbon segment. Analysts are expecting it to grow at about 25 per cent annually over the next two years, given the strong order book of Rs 7,400 crore or about 2.5 times its 2010-11 sales. Importantly, it is a zero-debt company, earning over 40 per cent return on equity. It has good cash flow and a large part of this is paid in the form of dividends. In fact, it is sitting on cash of about Rs 2,200 crore, almost 25 per cent of its market capitalisation. “At current levels, there is definitely value in the stock, considering the cash on the books and the dividend yield. We value the stock at Rs 400 per share, as against its current price at Rs 272.8," says Ravi Shenoy, who tracks mid-cap companies at Motilal Oswal Securities.