Increased dividend pay-outs by some of India's biggest companies are stoking a rally in Asia's worst performing market this year.

Dividends are in vogue around the world as investors scarred by the bear market turn to defensive stocks with steady pay-outs. Low bond yields have fuelled demand for dividends.

In India, where bond yields are at three-decade lows, there is an additional incentive since investors no longer have to pay tax on dividends.

"Dividend yield has been a catalyst for the recent rally," said Aniket Inamdar, a fund manager with Cholamandalam Asset Management.

The dividend story started to catch investors' fancy when state-run refiners surprised the market with strong pay-outs, helping fuel a 13 per cent market recovery from April lows.

Kochi Refineries Ltd announced a dividend of Rs 10 per share in late April, a massive yield of about 21 per cent. The stock has nearly doubled in value since then.

Refiner Bharat Petroleum Corp set a dividend of Rs 13, yielding 5.5 per cent, and Bongaigaon Refinery & Petrochemicals Ltd said it would pay Rs 2.7 per share to yield nine per cent.

"A higher pay-out reflects companies' confidence in sustaining earnings growth momentum," said Delhi-based K K Mittal, a portfolio manager with Escorts Mutual Fund.

The Bombay Stock Exchange's top-30 share index skidded to a six-month low in late April when former market darlings such as Infosys Technologies slumped on fears of slowing growth.

The dividends have helped push up the index from the April lows, but Bombay's stock market is the only Asian bourse that's still in the red this year with a loss of about 1.4 per cent.

The dividend yield on India's most-widely tracked share index in the year ended March was 2.28 per cent, up from 2.14 per cent for the year earlier.

Dividend yields are 3.96 per cent for Thailand, 3.66 per cent for Singapore and 4.2 per cent for Hong Kong for the current year.

Lowest interest rates

The bank rate, the Reserve Bank of India's main interest rate signal, is at a three-decade low of six per cent. It is down two percentage points from eight percent in 2001.

The yield on the benchmark 10-year federal government bond has nearly halved in the past three years to 5.75 per cent. It is just slightly above current inflation of around 5.65 per cent.

Some stocks currently sport dividend yields that match or exceed this rate of return.

India's biggest private steel maker, Tata Iron & Steel Co has doubled its dividend to Rs 8 per share -- yielding about 5.3 per cent at Wednesday's closing price of Rs 150.90. By contrast, one-year Tisco bonds currently yield about 5.1 per cent, which is taxable.

"Assuming that the company maintains its dividend pay-out, holding Tisco shares is much more lucrative," Inamdar said.

"We have a unique situation where the dividend and the bond yields have nearly converged, which underscores the undervaluation of the equity markets," he said.