Investing in high dividend yield stocks can be rewarding amid market slump

Dividend yield remains one of the key parameters that investors take into account when selecting stocks during a downturn. In a bull market, when street sentiment is strong, investors tend to put more weight on capital appreciation through higher stock prices, but if it goes down, the dividend yield gains in importance . Investors examine the dividend yield to ensure that a certain return on investment remains assured, even if stock prices remain moderate. High dividend yields also tend to provide a bearish cushion for stock prices.

In the current scenario, as uncertainties weigh down and indices correct, investors may consider higher yielding stocks.

Experts believe, however, that if the dividend yield offered is a parameter to examine, in the current scenario, it should be combined with earnings growth prospects.

Amar Ambani, research manager, YES Securities, warns: “High dividend yield stocks need to be considered on a case-by-case basis, as many of them may not be attractive investment bets.”

There are actions among public sector companies that comply with the government’s directive on declaring dividend yields up to 5 percent of their net worth, regardless of their profits. This leads to depleted cash flow and companies also have to repay their debt. Companies such as ONGC saw their cash and cash equivalents drop to Rs 6,700 crore as of September 30, 2019, dropping from Rs 24,700 crore at the end of 2016, while its net borrowing increased to around Rs 1 trillion against Rs 21,500 crore during the period

Experts say that one day the tap will run out of water, declaring big dividends. Dividend yield and growth prospects therefore need not be combined.

Binod Modi of Reliance Securities says that while there are stocks like Coal India and many others that offer good dividend yields, investors in this market should also look at stock valuations and some may see a drop, even from these levels, given the uncertainties.

Meanwhile, experts also say that one can choose stocks that have corrected significantly and can yield solid gains.

Rusmik Oza Chief Research Officer – PCG at Kotak Securities says that investors should consider a combination of parameters. Valuations, earnings growth forecasts and upside potential need to be taken into account as well as the dividend yield when selecting stocks.

Some stocks are probably less affected by the disturbances caused by Covid-19, but have experienced a significant decline. Even though the demand for electricity has fallen in recent times, stocks like NTPC and Power Grid, which have ensured the revenues of regulated companies, also offer a high dividend yield. Even companies like Bharat Electronics (which depend on defense activities) and Cochin Shipyard remain well placed in terms of growth and also offer good dividend yields.

Likewise, companies like Hindustan Petroleum, Bharat Petroleum, Indian Oil and gas utilities such as Mahanagar Gas and Petronet LNG also meet growth parameters and have a good increase compared to current levels, explains Oza, who however believes that the investor portfolio should include the private sector. businesses and public sectors.

Its choices include Federal Bank, Tata Chemicals, ITC, Infosys, HCL Tech, Vedanta, Castrol and Embassy Office Parks REIT in the private sector. These companies offer a high dividend yield and also have good upside potential.

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