Investing in high dividend yield stocks can be rewarding amid market slump

Consider valuations and earnings growth along with dividend payouts while picking stocks

Dividend yield remains a key parameter that safety-seeking investors consider, while picking stocks during a downturn.

In a bull market, when the Street sentiment is strong, investors typically assign more weight to capital appreciation through higher share prices. However, during a downturn, dividend yield gains more importance.

Investors look at the dividend yield, so as to ensure a certain amount of return on their investment, even if share prices remain subdued. High dividend yields also tend to provide a downside cushion for stocks.

In the current scenario — with uncertainties weighing and indices correcting sharply — investors may consider high dividend yield stocks.

With yields on long-term (10-year) government securities expected to slip below 6 per cent, it will only make high-dividend yield stocks attractive. Experts, however, feel that while the dividend yield being offered is an important parameter, it should be combined with the outlook on earnings growth, in the current scenario.

Amar Ambani, research head at YES Securities, says: “High dividend yield stocks need to be considered on a case-to-case basis, given that many may not be attractive investment bets.”

There are stocks of public sector firms meeting the government’s directive on declaring dividend yield to the tune of 5 per cent of their net worth, irrespective of the profit they record.

 

 

This has led to depleting cash positions, with companies also needing to service debt obligations. Companies such as ONGC have seen their cash and cash equivalents decline to ~6,700 crore as on September 30, 2019, from ~24,700 crore at the end of FY16, while net borrowings increased to about ~1 trillion from ~21,500 crore during the period.

Experts say that one day, the tank will run dry due to big dividend payouts. Therefore, it is not necessary that dividend yield and growth outlook go hand-in-hand.

Binod Modi of Reliance Secu­ri­ties says that while there are stocks like Coal India that offer good dividend yield, investors in this market need to look at valuations too, and some stocks may see a downside even from current levels, factoring in the uncertainties.

In order to pick the good ones, Rusmik Oza, head (research) of PCG (private client group) at Kotak Secu­ri­ties, says investors should look at a combination of parameters.

Valuations, earnings growth expectations, and the upside potential should be considered. There are stocks that are likely to be less affected by Covid-19, but have seen significant decline.

Even though power demand has declined of late, stocks like NTPC and PowerGrid — which have assured revenues from regulated businesses — offer strong dividend yield as well.

Once demand revives, there could be capital appreciation too. Even companies as Bharat Electro­nics (dependent on defence) and Cochin Shipyard remain well-placed in terms of upside, and offer good dividend yield.

Likewise, firms like Hindustan Petroleum, Bharat Petroleum, Indian Oil, and gas utilities such as Mahanagar Gas and Petronet LNG, also meet parameters on growth and have good upside, says Oza.

However, he adds that investors’ portfolios should include private sector companies. His picks include Federal Bank, Tata Chemicals, ITC, Infosys, HCL Technologies, Vedanta, Castrol and Embassy Office Parks REIT. These offer strong dividend yield and have good upside potential.