High Dividend Yield Stocks

A conservative approach, but benefits investors especially during bear phase

As investors we often use the terms savings and investments interchangeably --that is to use one's extra money for some gains. However, there is a fine line which differentiates savings from investments.

After a strong rally since late April, the stock market has again turned volatile with the sensex mostly hovering around the 25,000 mark for the last few weeks. In such volatile times, investors could look at stocks with high dividend yields.
And those who are not experienced enough to invest in the market directly, can take the mutual fund route.

Dividend yield is the amount of dividend per share divided by the price of that share. The higher the dividend yield, better it is for investors to invest in the stock. In times when the stock market is going down, any drop in the price of the stock that is paying a dividend leads to higher dividend yield. This in turn attracts more investors, which often reverses the falling trend in the stock even if the market is still falling.

Say for example, a company, say A, pays a dividend of Rs 10 per share. Price of stock A is Rs 100. So the dividend yield for the stock is 10.

Now if the price of stock A falls to Rs 90, the dividend yield rises to 11.1%. Thus even if the stock price falls, the rising dividend yield makes the stock more attractive. In India, this is even more attractive because as an investor, dividend is tax free in your hands.

There are investors who target to invest in companies that pay higher dividend. Although this investor trait is more pronounced in the developed market, where the rate of interest is low, but in India too there are investors who follow this strategy , if not for a large corpus, at least they prefer to put some money in high dividend stocks.

A strategy to target high dividend stocks has two advantages, financial planners say . For one, this is a conservative approach with less chance of a loss. Secondly, this also brings in a process of asset allocation which is in-built and self correcting. In a rising market, with higher stock price, dividend yields automatically fall, while in a falling market, dividend yields rise.

It is also seen that during market volatility , the value of dividend income rises even more. It is observed that in volatile markets as investors become more doubtful about any rise in stock prices and they fear about losing money , they rely more on dividend incomes. Market players say in such conditions investors should look at investing in high dividend paying stocks that have the ability to provide a cushion against sharp market downturn by assuring an income stream.
Dividends provide a downside protection to the portfolio in times of market downturns and continue to remain an l added attraction during upturns.
How it works Several of the fund houses offer dividend yield schemes in which experienced fund managers do the work of investing in high dividend paying stocks for you. These funds build a portfolio of stocks of companies with good history of dividend payment and pay you dividend as the schemes get dividend from their portfolio companies.

There are some basic principles these schemes follow. First, since dividend yield of a stock is inversely proportional to its price, the fund manager selects stocks with higher dividend yields. Next is to consider companies with high cash flow, which is to guarantee the ability of the company to pay dividend. Usually, companies with stable businesses and growing at an above average rate are more likely to pay a good dividend. The third attribute is to look for stocks with a history of dividend payment.

Historical studies have shown that dividend yield funds usually do well in all type of market conditions except when there is euphoria on the bourses. So in a euphoric market, there are chances that dividend yield schemes may lag in their performance compared to other equity schemes. However, a positive attribute for dividend yield schemes is that studies have shown net asset values (NAVs) of dividend yield funds show lower fluctuations compared to NAVs of most other types of equity funds.