Smart stock-picking tips

A common question amongst investors is whether or not they should buy stocks now. Some say it is a great time to pick stocks. Others say that bull run is over and to keep away from the market.

As a stock market investor, I bought stocks recently and am sure that the market will pick up.

But, when buying, I look at a stock that fulfills both these conditions: fundamentals and dividends.

Dividends refers to an amount paid to shareholders from a company's after-tax earnings.
Fundamentals is when one analyses a stock based on the fundamental facts about a company: profits, sales, earnings, dividends, assets, products, competition, loans and growth potential.

Here's how I pick my stocks.

Good dividend yield stocks

Let's look at Mahindra Ugine Steel. This value of this stock has been badly hit in the present stock market slump and now can be bought for around Rs 90.

Let's say you buy it at the above rate and hold on to it. And the company declares a dividend of 45%, which is Rs 4.50.

The dividend is always declared on the face value of the share, not on the current market price. Since each share is priced at Rs 10, 45% of that is Rs 4.50.

Since you are paying Rs 90 and not Rs 10, the dividend yield works out 5% (4.50 x 100/90) of your investment.

So, whatever happens to the market, you are at least assured of 5%.

I also bought GNFC for Rs 82; its dividend of Rs 4.25 gave me a 5% return. I also bought City Union Bank for Rs 86; the dividend of Rs 4 gave a 4.65% return.

Get Ahead reader Subodh Karode also speaks of consistent dividend paying stocks in 5 tips on stock picking.

Never ignore fundamentals

The reason I bought the above stocks is because I believe their fundamentals are strong.

Mahindra Ugine Steel

A glance at the above reveals that sales and net profit have kept increasing over the years. This resulted in an increase in the Earnings Per Share.

EPS = net profit/ number of shares

EPS is the net profit divided by the total number of shares. So, if a company's EPS has grown over the years, it means the company is doing well, and the price of the share will go up. If the EPS declines, that's a bad sign.

GNFC

The demand for fertilisers is on the rise and the company recently acquired Narmada Chematur Petrochemicals Ltd – NCPL. Based on these developments I picked it up.

City Union Bank

Apart from its sound financials, the company is also expanding its operations and services.

Get Ahead reader Badari Ramesh speaks of why fundamentals are necessary in Why stock tips are dangerous.

Hemil Shah is a Get Ahead reader who dabbles in shares.

Why don't you tell us what you look for when buying a stock. Hot tips? Fundamentals? Frequent dividends? Low PE ratios? We would love to hear from you.

Date in the tables has been sourced from the BSE web site.