Dividend yielding stocks seen a safe bet

There is no denying that equity investing is fraught with inherent dangers. Especially so, when markets are unpredictable. Last week's correction in the markets, after the index touched 7900 in the previous week has again forced players to look at defensive options.

Mutual funds have also got into the act and many have launched dividend yield schemes, which are cut out for such a scenario. The premise is that when you are not sure of the direction of the market, it makes sense to stick to the safer option of stocks that give you a return nevertheless, in the form of dividends.

Dividends are the best form of earning returns on a stock whether or not it provides capital appreciation. That way investing in dividend-yielding stocks is one way of ensuring safe returns.

Though, funds investing in these stocks may not be able to give super normal returns in a bull market, investors will be better off investing in these funds in a bear market.

The latest addition to the growing stable of dividend yield funds come from ABN Amro Mutual Fund. Like others which have walked this path before, the fund hopes to provide stability in a volatile market.

According to Mihir Vora, head of equities at ABN Amro Mutual Fund, the fund does not intend to position its dividend yield fund as a defensive strategy. "Apart from those giving regular dividend, we will invest in stocks that offer a chance for capital appreciation," says Vora.

The fund notes that higher dividend yields are usually associated with companies which are profitable with stable cash generation. Also, sustained dividend yield usually indicates relatively lower valuations, thus, bringing in a margin of safety in terms of valuations.

Analysts note that market sentiment continues to remain bullish in the longer term, backed by strong fundamentals and expected economic growth of the economy. However, as valuations go up higher, the risk of downsides also increases.

"Dividend yield funds can be a good investment option in volatile markets owing to reduced downside," says Vora. "These can be an ideal addition to your equities portfolio and, thus, diversify your investment strategies," he goes on to add.

The other funds in the market offering a similar product are Tata Dividend Yield fund, Birla Dividend Yield Plus, Principal Dividend Yield and UTI Dividend Yield.

On an average, the dividend yield funds have given returns of 10.67 per cent in the past quarter and 16.93 per cent in the past six months. Sensex returns for the same period amounts to 16.11 per cent and 16.60 per cent, respectively.

Analysts note that if you are a cautious investor and believe in long-term investment, then dividend yield fund may be a good option to tide over uncertain times.

For investors who wish to invest directly in dividend yield stocks, Sharekhan has shortlisted nine stocks which offer yield of more than 3.5 per cent, based on dividends declared by them in the last financial year.

To ensure that their dividend yield is sustainable, the research report has discounted any special dividends and one-time dividends declared by them.

The top picks in the list include Zenith Fibers, which had a dividend yield of 5.4 per cent based on the prevailing price of Rs 27.8. The company has a payout ratio of 44 per cent and the stock is up for book close on September 24, 2005.

Similarly, Tele Data Informatics offers an yield of 4.8 per cent at the prevailing market price of Rs 31. The stock has a payout ratio of 18 per cent and will go for book closure on September 8 2005.

Samkrg Piston has a yield of 4.5 per cent at the market price of Rs 112.4. The company has a payout ratio of 63 per cent and is due for book closure on September 23. Other stocks include Elegant Marbles (dividend yield 4.2), N G Industries (3.9), Krypton Industries (3.8), S I Paper Mills (3.7), Narmada Chematur(3.7), Gujarat Apollo Equipments (3.6).