Investing in high-dividend yielding stocks may be a good strategy: Experts

At a time when economic and corporate growth is slowing and despite the recent correction, the markets remain at elevated levels, making stocks vulnerable due to high valuations, investing in high-dividend yielding stocks may be a good strategy for investors.

The euphoria, which started with the general election outcome giving a second consecutive term to the NDA, was short-lived, mainly due to the increase in surcharge on incomes of super-rich individuals announced in the Budget earlier this month. Moreover, some FIIs, too, are likely to see their tax liability increase if they do not change to a corporate structure. The ghost of a trade war and slowing global growth, among others, have made investors nervous.

As a result, sentiment has turned weak with foreign investors reducing exposure to Indian equities and domestic investors going slow in committing fresh funds, thus increasing the downside risk.

The Nifty50 is now about 7 per cent off from its all-time high of 12,103 on June 3.

In such a scenario, high-dividend yielding stocks can be a good option, say experts. “After the announcement of tax increase, cash flow in the Indian equity market has taken a U-turn. Foreign investors are taking money out of the markets. We believe the markets would remain range-bound in the short term. So, high-dividend yielding stocks with good fundamentals would be a better way to build up a portfolio,” says Kaustubh Belapurkar, director fund research at Morningstar Investment Adviser.

Post the Budget till July 25, the Indian equity market saw $1.6 billion (Rs 11,000 crore) of FII selling.

G Chokkalingam, founder and managing director at Equinomics Research, echoes the view, though he foresees limited downside risk in the market from current levels.

However, experts say it is not only high tax, but the overall slowdown in the economy and pain in some sectors such as automobile, non-banking financial companies (NBFCs), including housing finance companies, among others, have also eroded investor confidence in the Indian markets. The overall consumption story is slowing, which is visible in the June 2019 quarter (Q1) results of many major players. And the situation may not change soon.

Hindustan Unilever, for instance, clocked volume growth of just 5 per cent during the June quarter, as against 7 per cent in the March 2019 quarter. Bajaj Finance, India’s largest consumer financier, also cautioned about slowing growth and saw an increase in bad loans. Maruti, India’s largest carmaker reported a 27 per cent year-on-year fall in profits. There are high chances of India Inc’s earnings getting downgrades after a poor Q1.

Recently, the IMF, too, lowered its projection for India’s economic growth by 0.3 percentage point to 7 per cent for 2019-20 due to subdued domestic demand in sectors mainly automobile.

Even while choosing high-dividend yield companies, investors have to apply certain filters and criteria.

“Investors should be mindful of the stress some sectors are going through and balance sheet strength of the companies and should not consider dividend yield criterion in isolation while picking up stocks,” cautions Chokkalingam.

In a bid to identify some potential candidates, Business Standard Research Bureau looked at the BSE 500 companies with consistent dividend payouts for the past five years; the latest dividend yield being over 4 per cent. In some cases, while dividends are yet to be approved by shareholders, most of these companies have low debt and price-to-earnings ratio (stock valuation) in single-digits.

However, investors could do well by picking quality names with good profit stability, says the CIO of a domestic mutual fund , who believes there is little hope of near-term market recovery.

Karnataka Bank and the BSE Ltd are among a few other high-dividend yield stocks that experts are currently recommending.