Negative real rates could drive investors towards high-yield stocks

The list of stocks with high yield is dominated by PSEs: Coal India currently offers a maximum yield of 9.8%, Hindustan Zinc 7.4%, ONGC 6.9% and GAIL India 6.8%

Real rates in India have slipped into the negative zone with inflation above 7 per cent and yield on the benchmark 10-year government security (g-sec) well below 6 per cent. This could drive many investors towards stocks that offer high-dividend yield, say analysts.

“Over the past one year, as interest rates continued to dip and inflation rose, real interest rate has dipped into the negative territory which has improved prospects for high dividend yield stocks. High dividend yield stocks appear attractive as their yields are now comparable to other fixed-income instruments while having the added advantage of ‘inflation hedge’ characteristics of stocks as an asset class,” said Vinod Karki and Siddharth Gupta, analysts at ICICI Securities in a note on Monday.

So which are the stocks with high yield? The list is mainly dominated by public sector enterprises (PSEs). Coal India currently offers the maximum yield of 9.8 per cent. It is followed by Anil Agarwal-led Hindustan Zinc (7.4 per cent), ONGC (6.9 per cent) and GAIL India (6.8 per cent).

The dividend yield for all these four stocks is at least 90 basis points more than the 10-year g-sec yield, which is currently around 5.9 per cent.

Shares of ONGC (up 6.8 per cent), GAIL (India) (3.5 per cent) and Coal India (1.1 per cent) outperformed the benchmark indices in Monday’s trade. The Nifty 50 index gained 0.5 per cent.

ICICI Securities analysts say high-yielding stocks have performed in the past when real rates have turned negative. “Observation of rolling one-year returns indicate the bulk of the outperformance of Nifty Dividend Opportunities 50 index was during the FY10-12 period when real yields remained negative persistently.”

Some say there is a downside of chasing stocks with high yield. Dividend yield is an indicator of past payouts. It doesn’t guarantee that a company will continue to reward shareholders at the same rate, they add.

ICICI Securities believes the postponement of capex spending and improved balance sheet strength could allow higher dividend payment or buybacks in the near term. In the past few years, however, high-dividend-paying stocks have been laggards as investors have chased high-growth opportunities. Overall, the PSE pack has been out of favour as the “value trade” has lost its allure, say analyst.

ICICI Securities analysts caution investors that one shouldn’t blindly invest in stocks that offer high yield. “Typically, high yielding assets are associated with high risk (high yielding bonds are considered junk) and efficient markets will price higher risks with higher yields. Prudent dividend-yield strategy can control the above risks by identifying stable businesses with robust fundamentals (adequate returns on equity and cash flows) and a check on ‘quality of earnings’.”