Should you invest in PSU stocks because of the high dividend yield?

Do not get fooled by the high dividend yield on PSU stocks!

high dividend yield on PSU stocks

PSU stands for Public Sector Undertakings. These are connected very closely to the close sectors of the economy and have been quite successful in building up a strong industrial base in India. Thus, PSUs are crucial to our economy. In a PSU, the state or the central government holds most of the stakes. Thus, these are backed by the government and by looking at the numerous times that the government has recapitalised banks in the public sector, it is pretty obvious that it won’t let PSUs fail. The government can completely own a PSU, but the minimum stake has to be at least 51%.

Lots of PSUs pay handsome dividends. With huge assets and resources, one would be amazed at the total market value some PSUs hold. Moreover, there is corporate governance that needs to be acknowledged as their lapses are low when compared to private companies. Thus, investing in PSU might appear to be a cheap bargain given the high-yielding dividends despite the slow rate of growth. Well, here lies the trap.

Related: What are PSU stocks: How many PSU’s are listed in India?

Should you get excited by the high dividends paid by PSU stocks?

Despite their attractive dividends that may lure you into investing in a PSU, they just do not work in the stock market. It is not possible to hand over some enterprises to the public sector due to various reasons. You have to keep in mind here that poor performance is a very common feature of PSU companies. In the last decade, only 6 companies, out of a total of 42, have been able to outperform the Sensex at the Bombay Stock Exchange PSU Index. It is important to note here that they all had a 10 year long history in trading. 

As PSUs are managed by the government, the fear of losing their job is one key reason behind their underperformance and leads to heavy mismanagement. Also, the management does not hold any stakes in the PSU, which eventually leads to negligence on their part. Moreover, no incentives are provided to the management for better performance. This could also be a contributing factor. Another major reason can be bureaucracy. In any PSU, approval for getting a certain project started requires a long period of time. This is mainly due to the numerous layers of bureaucracy present in them. Thus, when you compare the pace of execution of a PSU to the companies in the private sector, the latter will always have an edge due to the absence of the many layers of bureaucracy that delays the job for a PSU.

Related: 5 best Indian PSU stocks to invest in 2022

Thus, it is always advisable to avoid investing in a PSU. The high dividend yields offered might seem very attractive, but they have a high tendency to get nullified due to the capital losses suffered by the PSU as they don’t perform well in the bourses. Therefore, you should look out for other options to invest in, as a PSU may not prove to be beneficial given its poor performance over many years. However, if you are experienced, have proper knowledge of the market, and really know what you are getting yourself into, then the call is all yours to make. Thus, you can take a tactical call and add the investment in a PSU to your portfolio if you really know the ropes. 

Related: Pros and cons of penny stocks

Top PSU stocks with dividend yield more than 10%

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

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