Play Safe, Use the Dividend Yield Strategy to Identify Best Stocks
Experts advise investors to build a portfolio around the dividend yield theme instead of betting on one or two stocks and remain invested for at least two to three years, says Nikhil Walavalkar
Increased dividends surely add to returns. They also offer some downside protection in a volatile market, say experts.
“Dividend yield can be a good yardstick, in addition to other factors, to assess shares of a company for investment,“ says Pankaj Pandey , head -research, ICICIdirect.com. ch, ICICIdirect.com.
Companies expect ed to report good growth and availa ble at attractive di vidend yields are good portfolio can didates. Pandey rec ommends Coal In dia and NMDC as they may benefit from growth in vol umes and better pricing for their mining output. Attractive yield at which these stocks quote, make them a good long-term investment buy , he says.
Play it Safe However, experts also ask investors not to give too much weightage to the rise in overall dividend payouts by companies. “Dividend payouts have not gone up in all sectors. While companies in FMCG and IT have increased dividends, cyclical companies have reduced dividends,“ says Bansal. Investors should also be wary of higher dividend yield, especially above 6%, says Gupta. “These can be cases of special dividends or some junk stock,“ he says.
Many a time, companies receive windfall gains by way of sale of as sets, settlement of court cases or though some other route and they share it with shareholders by declaring a huge dividend. Cash-rich companies may also declare a special dividend. This spikes dividend yield of the stock. Gupta recommends investing in quality stocks offering good dividend yield, such as Balmer Lawrie Investments, Coal India and Oil India. One can also look at quality mid-cap stocks that can benefit from the high growth and liberal dividend payouts in future, say experts. Bansal recommends investing in PI Industries and Divis Laboratories among mid-sized companies.
Experts suggest building a portfolio of stocks around the dividend yield theme instead of betting on one or two stocks. If you find this difficult, you can look at mutual fund schemes. There are eight such schemes that build their portfolios on the basis of dividend yield and have a long-term track record.
They have beaten the broad equity markets, represented by CNX Nifty, over past five years. Though dividend yield strategy looks good for investors, investors must be focused on the long term, say experts.
“The strategy will reward you if you remain invested with a twoto three-year view,“ says Pandey. If you are looking to cash in on the momentum, it does not suit you.