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Investing in dividend yield stocks during a bull run might not be the best of strategies to adopt. But these stocks can add a semblance of stability to one's portfolio during bouts of increased volatility. The Indian equity market might be going through one such volatile phase right now. With Greece staring at a default and a possible interest rate hike by the US Federal Reserve later this year, the market might be in for unpleasant jolts. Can dividend yield stocks be a good bet at this juncture?
Dividend yields stocks are typically less volatile than the market and are better insulated from sharp moves. The companies are cash-rich and most of them pay dividend once or twice a year. However, these stocks tend not to rise as much as other growth stocks during the periods of sustained uptick. “There is no particular time to invest in these stocks. Rather, I would say it is an evergreen strategy for conservative investors looking to diversify their portfolio and get consistent returns,” said Rikesh Parikh, VP – equities, Motilal Oswal Financial Services.
Investors into such stocks need to assess whether the company has been making consistent profits and paying dividends regularly. Investors should also assess whether the dividends are hurting the growth prospects of the company. “Looking at the income to capital employed ratio for the previous three years should give a fair idea if the growth in income is commensurate with the capital employed and if dividends payouts are eating into the income stream,” said Hiren Dhakan, associate fund and wealth manager, Bonanza Portfolio.
Dhakan adds one must choose stocks from the large cap pack, as paying out dividends can restrict the growth potential of mid-caps much more than that of large-cap companies. In any case, it's mostly the large-caps that pay out consistent dividends, as they do not have to reinvest a large part of their cash flow back into their operations. Dividend yield is the annual dividend per share by the stock's share price. For example, if a company's annual dividend is Rs 1.5 and the stock trades at Rs 25, the dividend yield works out to six per cent. As on June 30, NMDC had the highest divided yield (7.2 per cent) among BSE 100 stocks, followed by Coal India (5.07 per cent), Cairn India (4.95 per cent), Union Bank of India (4.04 per cent), Rural Electrification Corporation (3.92 per cent) and Canara Bank (3.7 per cent).
One can also invest in such stocks through the mutual fund route. A dividend yield fund typically invests 65-80 per cent of its corpus in stocks whose dividend yield is higher than the average dividend yield of the market.
“These funds can be useful for those wanting a regular income stream such as retirees,” said Suresh Sadagopan, a certified financial planner. According to him, investors in these funds can use the dividend transfer plans to transfer the dividends into debt schemes: “This can be a particularly useful strategy when the markets have moved up significantly and valuations look expensive.”
Dividend yield funds have given one-year returns of between 9.2 per cent and 25.6 per cent, according to Value Research. Experts warn against investing too much in these stocks. “If you have 15-20 years of working life left, invest up to 10-15 per cent in these stocks. If you are about to retire in less than five years, you can invest up to 25 per cent in these stocks, depending on your risk profile,” said Arun Kejriwal, an investment analyst. Hemant Rustagi, CEO, WiseInvest Advisors, says it is better to avoid dividend yield funds altogether if one is below 45. He also believes that, besides these funds, those wanting regular a stream of income can look at balanced funds and equity savings income schemes as some of them also pay regular dividends.
Dividend yields stocks are typically less volatile than the market and are better insulated from sharp moves. The companies are cash-rich and most of them pay dividend once or twice a year. However, these stocks tend not to rise as much as other growth stocks during the periods of sustained uptick. “There is no particular time to invest in these stocks. Rather, I would say it is an evergreen strategy for conservative investors looking to diversify their portfolio and get consistent returns,” said Rikesh Parikh, VP – equities, Motilal Oswal Financial Services.
Investors into such stocks need to assess whether the company has been making consistent profits and paying dividends regularly. Investors should also assess whether the dividends are hurting the growth prospects of the company. “Looking at the income to capital employed ratio for the previous three years should give a fair idea if the growth in income is commensurate with the capital employed and if dividends payouts are eating into the income stream,” said Hiren Dhakan, associate fund and wealth manager, Bonanza Portfolio.
Dhakan adds one must choose stocks from the large cap pack, as paying out dividends can restrict the growth potential of mid-caps much more than that of large-cap companies. In any case, it's mostly the large-caps that pay out consistent dividends, as they do not have to reinvest a large part of their cash flow back into their operations. Dividend yield is the annual dividend per share by the stock's share price. For example, if a company's annual dividend is Rs 1.5 and the stock trades at Rs 25, the dividend yield works out to six per cent. As on June 30, NMDC had the highest divided yield (7.2 per cent) among BSE 100 stocks, followed by Coal India (5.07 per cent), Cairn India (4.95 per cent), Union Bank of India (4.04 per cent), Rural Electrification Corporation (3.92 per cent) and Canara Bank (3.7 per cent).
One can also invest in such stocks through the mutual fund route. A dividend yield fund typically invests 65-80 per cent of its corpus in stocks whose dividend yield is higher than the average dividend yield of the market.
“These funds can be useful for those wanting a regular income stream such as retirees,” said Suresh Sadagopan, a certified financial planner. According to him, investors in these funds can use the dividend transfer plans to transfer the dividends into debt schemes: “This can be a particularly useful strategy when the markets have moved up significantly and valuations look expensive.”
Dividend yield funds have given one-year returns of between 9.2 per cent and 25.6 per cent, according to Value Research. Experts warn against investing too much in these stocks. “If you have 15-20 years of working life left, invest up to 10-15 per cent in these stocks. If you are about to retire in less than five years, you can invest up to 25 per cent in these stocks, depending on your risk profile,” said Arun Kejriwal, an investment analyst. Hemant Rustagi, CEO, WiseInvest Advisors, says it is better to avoid dividend yield funds altogether if one is below 45. He also believes that, besides these funds, those wanting regular a stream of income can look at balanced funds and equity savings income schemes as some of them also pay regular dividends.
