The interest rates are not going to go up in a hurry, and investors who are not looking to take that extra risk but still want the comfort of steady and relatively risk-free returns that are better than fixed deposits can look at high dividend-paying stocks.
The Reserve Bank of India’s Governor in the recently concluded MPC meeting highlighted that the primary focus of the bank is fueling growth in the economy, and the stance is likely to remain accommodative for an extended period of time.
A portfolio should have an ideal mix of growth stocks as well as high dividend stocks.
“It is always good to have high dividend-paying stocks together with growth stocks amid low-interest-rate environment as on the one hand, holding high dividend-paying stocks would fetch consistent return for the investors,” DK Aggarwal, Chairman & Managing Director, SMC Investments and Advisors Limited told Moneycontrol.
“On the other hand growth stock would prove to be wealth creator as growth companies usually perform well when the cost of capital become cheap,” he said.
Before we go ahead let’s understand what is a dividend? Well, a dividend is the distribution of earnings by a public listed company to a class of shareholders.
The dividend yield is nothing but a dividend-to-price ratio. It is the percentage calculated by dividing dividend per share by price per share.
The dividend yield is used to calculate the earnings on investment (shares) considering only the returns in the form of total dividends declared by the company during the year. For more click here
HDFC Securities in a recent report highlighted 8 stocks that have a dividend yield of more than 10% that include names like Coal India, Power Finance, REC, PTC India, Oil India, and NLC India, etc.
Note: The above table is for reference and not buy or sell ideas
“For conservative investors who wants to earn better returns than Fixed Deposit, stocks like Coal India, IOC which are trading at very cheap valuation and are attractive both on price and dividend yield front,” Nitin Shahi, Executive Director at Findoc told Moneycontrol.
“Other Than PSU’s, ITC Ltd. whose verticals FMCG and Agri products had started to perform well and will add value to the stock. Other Smallcap stock is Sonata Software whose dividend yield at the current price is between 5-6% and the stock has a good 3 years ROE of 34.22%,” he said.
Atish Matlawala, Sr Analyst, SSJ Finance & Securities also said that amid the low-interest rate scenario, investors can certainly look to move from FD to high dividend yields stocks.
What should risk investors do?
Ideally, a portfolio should be considered by including stocks that are defensive in nature and can give steady returns in times of crisis. Hence, some percentage of high dividend-paying stocks should be included.
But, for those who are looking for returns they should prefer growth stocks over high dividend-yielding stocks.
“The creation of a good portfolio is a factor of proper asset allocation based on fundamentals of underlying securities, which is then aligned according to the needs/goals of the investors,” Dinesh Rohira - Founder, CEO - 5nance.com told Moneycontrol.
“Although there will be the temptation to invest in high yield dividend stocks given the lower real returns in fixed income space, the decision to invest purely on the basis of dividend will be a mistake. The investors with allocation in quality Bluechip companies with strong cash flow will surely be rewarded along with price appreciation in the long run without having to alter asset allocation in the overall portfolio,” he said.
Rohira further added that the important part for investors is to evaluate the company in terms of their track-record and consistency in payout, overall business growth prospect, and sustainability of the business for a longer period.
For risky investors, growth stocks will be the better option. With the digitalization theme heating up IT, FMCG, and pharma space is likely to remain in limelight in 2021.
“TCS, Infosys can be good investment ideas for the longer-term horizon. In FMCG space, Hindustan Uni lever continues to grow consistently and can be one of the few beneficiaries of economic recovery in rural areas,” says Shahi of Findoc.
“In Telecom Space, Bharti Airtel looks attractive at current prices. With tariffs expected to rise in upcoming quarters. The stock can give good returns in the upcoming years,” he said.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.