Client Success Stories
- The Gratification Factor: Psychologically, receiving dividends gives investors a sense of immediate satisfaction, even if it’s a small amount. This can enhance the overall investment experience.
- Cash Flow and Business Optimism: A consistent or rising dividend yield can indicate strong cash flows and the company’s positive outlook. This is often seen as a signal of business strength and sustainability.
Historically, dividends have proven to be essential, especially during times of market distress like the Global Financial Crisis of 2008-2010, when stock prices fell sharply. Let’s examine how stocks with higher dividend yields fared during that period.
Are High Dividend-Yielding Stocks a Good Bet?
| Quarter | 0% Yield | 0-2% Yield | 2-6% Yield | 6-10% Yield | 10-17% Yield | 17%+ Yield |
|---|---|---|---|---|---|---|
| Q1 2008 | -14% | -9% | -8% | -1% | -9% | -4% |
| Q2 2008 | -3% | -4% | -5% | -9% | -11% | -9% |
| Q3 2008 | -27% | -21% | -16% | -15% | -13% | -18% |
| Q4 2008 | -33% | -17% | -18% | -25% | -31% | -30% |
| Q1 2009 | 1% | 0% | -10% | -11% | -12% | -10% |
| Q2 2009 | 37% | 34% | 29% | 27% | 33% | 43% |
| Q3 2009 | 23% | 18% | 13% | 21% | 27% | 46% |
| Q4 2009 | 3% | 2% | 6% | 2% | 6% | 5% |
| Q1 2010 | 6% | 3% | 4% | 5% | 9% | 11% |
| Q2 2010 | -15% | -6% | -10% | -10% | -8% | -9% |
Key Insight: Stocks with dividend yields over 17% lost only 1% of their value over ten quarters, whereas stocks offering no dividends lost more than 35%. This clearly demonstrates the benefit of high dividend yields during market downturns.
The Appeal of High Dividend-Yielding Stocks
- Stock A: No dividends (50% price fall)
- Stock B: 10% dividend yield (50% price fall)
Though both stocks lose the same percentage of their value, Stock B’s 10% yield offers investors a consistent income, which can be far more attractive than just holding a stock with no yield.
Are High Dividend-Yielding Stocks a Good Bet?
- Scarcity of High Dividend Stocks: In India, there are only about 15-20 stocks that consistently offer high dividends. While there are more stocks offering high yields during market corrections, they tend to be limited in number.
- Unpredictable Dividend History: Not all high dividend stocks maintain their payouts. Take Goodyear India Limited as an example. While the company currently offers a 9.7% yield, this was a surprise because, historically, the company paid dividends of just Rs. 12-13 per share up until 2021. The sudden spike in dividend payouts raises concerns about the sustainability of such yields.
- Dividend Yield Due to Falling Stock Prices: Some stocks appear to offer high dividends simply because their stock prices have fallen sharply. For example, Steel Authority of India (SAIL) offers a 13% dividend yield due to a sharp decline in its stock price, but such high yields can be unsustainable.
Dividend Yield Mutual Funds: A Viable Option?
Dividend yield mutual funds invest primarily in companies that offer above-average dividend yields. However, these funds often have flexible investment criteria, meaning they may include stocks with low or no dividend payouts. For example, the HDFC Dividend Yield Fund has many large-cap stocks with modest yields like Hindustan Unilever (1.5%) and Infosys (2.1%).
Performance Data of Dividend Yield Funds (as of 12 October 2022):
- 1-Year Return: -2.39%
- 3-Year Return: 19.22%
- 5-Year Return: 10.25%
Compared to Large-Cap and Mid-Cap funds, dividend yield funds tend to underperform during bull markets when investors chase growth stocks. Thus, these funds are not a one-size-fits-all solution but can still be part of a diversified portfolio.
Bottomline
As with all investments, remember that dividend yields may fluctuate, and high yields may not always indicate a healthy business. Keep these considerations in mind to make informed, prudent investment decisions.
How to Invest in High Dividend-Yielding Stocks
- Look for Defensive Sectors: Investing in healthcare, FMCG, or telecom companies can offer stability, as these sectors have growing demand and tend to pay stable dividends.
- Focus on Dividend Growers, Not Just Payers: Investing in companies that consistently grow their dividends is a safer bet than those offering high dividends that may not be sustainable. Companies with a long history of increasing dividends tend to perform better over the long term.
- Use Dividend Stocks as a Fixed Income Alternative: If you’re seeking higher returns than fixed deposits, consider allocating some of your debt portfolio to high dividend-yielding stocks. However, be aware that this comes with increased volatility.
Hi, this is a comment.
To get started with moderating, editing, and deleting comments, please visit the Comments screen in the dashboard.
Commenter avatars come from Gravatar.