High dividend paying companies There are generally mature firms with low reinvestment requirements and steady cash flows. The important metric when valuing a dividend-paying stock is the ‘dividend yield’. The dividend yield is calculated by dividing the annual dividend per share by its current market share. For example, if the annual dividend from stock ‘X’ is Trades 10 more stocks 300, the dividend yield of stock ‘X’ is 3.3%. As per the data of previous years, such companies tend to outperform other stocks during recessions Market, For example, during the last few bearish phases in India, the Nifty Dividend Opportunities 50 Index outperformed the large-cap (Nifty 50, Nifty 100) as well as the broader market (Nifty 500) indices.
Nitin Shanbhag, Senior Executive Group VP, Investment Products, Motilal Oswal Private Wealth, said, “In addition to providing consistent dividend yield, many dividend-paying stocks, usually part of defensive sectors, are prone to extreme volatility and economic slowdown. Weather likely. “Better than cyclical sectors” and therefore outperform during bear markets. As of April 29, the Nifty Dividend Index is mostly composed of companies from the IT and FMCG sectors, which are defensive in nature. Companies from oil and gas, construction and mining, including PSU companies Sectors also have a good share in the index.
“Businesses that do not require their profits and return them to shareholders according to a clear payment policy are certainly safe-haven stocks. In bear markets, they provide a safety net and when money A security chase is likely to offer a price profit opportunity,” said Shyam Shekhar, Founder, Idea Financial Consulting LLP. But, relying on dividends as an alternative to regular income from fixed-income sources may not be a good idea. Dividends are variable, whereas interest on bonds or fixed deposits is fixed, with only the risk of default. Also, in India, dividend yields are traditionally not very attractive compared to returns. Fixed deposits, which are a safer option than equities. “In India, except in very rare cases, the average dividend yield over the last 30-40 years was between 1% and 3.5%. This is in contrast to what we see in developed economies such as the US, where, according to past data, dividends The returns are higher than bank deposits,” said Tanushree Banerjee, co-head of research at EquityMaster.
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Dividend-paying stocks may underperform when the market is high or during a bull market, when growth stocks are the most preferred by investors. In addition, dividends are not a very tax-efficient way to earn returns. Dividend earned by an investor is taxable at their slab rate (TDS applicable). However, capital gains tax in excess of 10% is levied on returns from a stock in the form of capital gains. 1 lakh sold after holding period of 1 year.
When screening for dividend paying stocks, a high dividend yield with a consistent dividend payout policy is preferred. “When a company’s dividend yield is high, it usually means that the valuation of the company is not very expensive,” Banerjee said. This can be seen in the graph which shows the inverse relationship between valuation (represented by the price-earnings ratio) and dividend yield. “Currently, dividend yields are above average, but not as high as in a bear market,” Banerjee said. Shekhar of Thought Financial Consulting said, “It is always a good time to invest in such stocks with high dividend yields. Having said that, experts caution investors about selecting stocks based on dividend yield only. because many variables affect this metric.
dividend-yield fund
Taking exposure to dividend companies through dividend-yield funds can also be considered, which invest at least 65% of total assets in dividend paying stocks. There are five dividend-yield funds with a track record of at least 5 years. However, the performance of most of these funds has not been very impressive. Only Templeton India Equity Income Fund was able to beat the benchmark – Nifty Dividend Opportunities 50 TRI Index (Tier 1) – in the short and long term. Note that, dividend yield funds are not the same as the dividend option (income distribution cum capital withdrawal option) of mutual fund schemes, whereby the investment gains are redistributed to the unitholders over a period of time. If you opt for ‘Growth’ option of Dividend Yield Fund, the dividend earned on the investment will be reinvested by the fund. Dividend yield funds are also tax-efficient because gains at the time of redemption are taxed as capital gains.
conclusion
Exposure to dividend paying stocks for maximum return or regular income should be considered for downside protection. Also, factor in the taxation of dividends (at the slab rate). Dividend yield funds are more tax efficient, but they have not had a good track record in beating benchmarks.