The Kelkar committee recommendation to scrap long-term capital gains tax and dividend tax is expected to provide a new asset class of equity yielding high returns amid falling interest rates, especially for the risk-averse retired people.

According to analysts, the implementation of these two recommendations in the forthcoming Union Budget will increase effective returns in comparison with the current tax outgo on this account.

"Apart from A group stocks, there are about a 100 good stocks in the B1 segment of the secondary market which can provide a direct and immediate benefit in terms of dividend yield," an analyst said.

Playing on the dividend yield, according to portfolio managers, is considered to be one of the best ways to protect the capital while ensuring returns in a range-bound market.

In a falling interest rate regime, investing in dividend-yielding companies may give good returns better than fixed-income instruments, feel analysts.

In addition to the dividend yield, such investments also have the possibility of additional capital gains on account of appreciation of the share price over a period of time. So, dividend yielding stocks offer an opportunity to profit from a market rally and at the same time offer downside protection.

Dividend-yielding stock essentially means comparing the dividend declared by companies with their market price.

One has to look at the current share price of the company and the latest dividend declared by the company.

Stocks that pay out a higher dividend in relation to their share price are known as dividend yield stocks. So, dividend yield basically indicates investment in a stock at the current share price, likely to earn if the benefits came only in the form of dividends.

However, what is important is the dividend yield which is the latest dividend per share / market price expressed as a percentage.

For example, G E Shipping has a consistent track record of dividend payment over the past years. For the year ended March 2002, the company declared a dividend of 40 per cent, which is Rs 4 per share on a face value of Rs 10, that is, 40 per cent of Rs 10.

At the current market price of about Rs 34, the dividend yield works out to be 11.8, which is fairly high compared to fixed income instruments offer for a year.

There are many stocks in the A and B1 groups offering more than 5 per cent dividend yield and also likely to benefit from the Kelkar Committee recommendation in the immediate future.

These companies include (Dividend yield in brackets at current market price) Vaibhav Gems (11.98), Chambal Fertilisers & Chemicals Ltd (10.79), AFT Industries (10.64), V I P Industries (10.39) Vardhman Polytex (10.24), Finolex Industries Ltd (9.87), Kakatiya Cements Sugar & Industries (9.09), Sutlej Industries Ltd (8.75), Indian Card Clothing Company (8.71), Tata Chemicals Ltd (8.29), NRB Bearings Ltd (8.06), Gujarat Narmada Valley Fertilisers Company Ltd (8.04), DCM Shriram Consolidated (7.99, Nahar Exports (7.79), Alfa-Laval (India) (7.41), Alok Industries (7.12), Hero Honda Motors (7.09).

West Coast Paper Mills (7.03), Krebs Biochemicals (6.92), Chennai Petroleum Corporation (6.88), Carborundum Universal (6.87, Century Enka (6.81), Advani Oerlikon (6.78), Mirza Tanners (6.67), Gujarat Ambuja Exports (6.42), Nahar Spinning Mills (6.21), Nilkamal Plastics (6.12), Savita Chemicals (6.09) and Indraprastha Medical Corporation (6.05) among others.

The other stocks include Simplex Concrete Piles (India) Ltd (5.99), Kirloskar Oil Engines Ltd (5.83), India Glycols Ltd (5.81), Andhra Pradesh Paper Mills (5.78), CG Igarashi Motors (5.72), Tata Sponge Iron (5.71), Elder Pharmaceuticals (5.59), Rajasthan Spinning and Weaving. Mills (5.52), Tamil Nadu Newsprint & Papers (5.51), Godrej Consumer Products (5.42), Orchid Chemicals & Pharmaceuticals (5.29), Thirumalai Chemicals (5.20), Clariant (India) (5.13) and Vanavil Dyes & Chemicals (5.01).

Run-up to the Budget 2003