Time to cash in on dividend stories

Wed, 16 Mar Pre-Open

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If one looks around for investment themes in current times, one could come across many. There are those advocating investment in commodities due to demand supply mismatches. The latest crisis in Japan may only accentuate this in the long term. Investment in gold due to the rampant money printing in developed markets is also a strong argument. But we would like to draw attention to a theme that is a value investor's favourite during times of market meltdowns. It goes by the name 'high dividend yield stocks'. High dividend yield essentially means stocks that earn higher dividend per share as compared to their market price. A ratio of dividend to price per share indicates the investors' return on capital purely from dividends earned.

During times of earnings downgrades we often find investors lapping on to stocks where the dividend payout is good. But the sad part is that they do so even if the valuations are expensive. The dividend yields are in fact a safer way to buy into stocks that have a steady history of dividend payouts.

Another advantage of having fundamentally sound dividend stocks in one's portfolio is the fact that these tend to be relatively stable vis-à-vis the markets. That is in the event of a considerable fall in overall markets, the prices of these stocks remain relatively less affected. This is primarily because during times of falling prices, the dividend yields of these stocks become very attractive. As a result of this, the downside in these stocks is limited until and unless there is something seriously wrong with the fundamentals of the company. Moreover, these stocks tend to appreciate with the general markets, though the rise may not be very spectacular. Thus, dividend stocks are a good option for investors with lower risk appetite and who prefer a steady income with a scope for capital appreciation.

However, from an investors' point of view, the 'total return' on the stock is more appropriate yardstick as compared to only the capital appreciation or only the dividend yield. This is because the gains from such stocks are a factor of dividends earned plus capital appreciation over the years.

The current market scenario leaves sufficient scope for investors to hunt for long term bargains. But it would be worthwhile to arm one's portfolio with high dividend yield stocks, just in case the weakness lurks longer than expected.