Volatility in the equity market is likely to strike occasionally at least for a period till election outcome, and thus auguring a need for a portfolio which is able to withstand this short-term noise.
Indian market created history this week as Sensex and Nifty both hit record highs. The S&P BSE Sensex surpassed 39,000 to hit an all-time high of 39,270 whereas the Nifty50 surpassed 11,700 to hit a life high of 11,761 on April 3.
History suggests that whenever the market makes highs, it is the high beta pack that rallies the most. But in a well-diversified portfolio, investors should have some dividend-paying stocks too, suggest experts.
High dividend paying stocks are usually considered as safe options in the times of high volatility. Markets will not always remain at highs and will find itself surrounded with sellers, it makes sense for investors to get into quality dividend stocks to minimise losses.
Dividends are part of profits that are given to shareholders of the company as a reward for being part of the business. Dividend income of up to Rs 10 lakh is exempt from tax.
These companies are usually well-established enterprise with a robust business model, large balance-sheet, higher market share, and prevailing in the field for a very long period of time.
Volatility in the equity market is likely to prevail for a period till election outcome, and thus auguring a need for a portfolio that is able to withstand this short-term noise.
“Needless to say, apart from capital appreciation or growth, dividends are also a part of overall returns on investment, which becomes an essential catalyst in the portfolio to compound wealth on a long-term basis,” Dinesh Rohira - Founder, CEO - 5nance.com told Moneycontrol.
“With inherent risk in the equity market with constant swings and volatility on a short-term basis, having a diversified portfolio backed by both growth and dividend-paying stocks with defensive traits becomes an ideal strategy to minimise overall fall in the portfolio,” he said.
What should be the percentage of dividend stocks?
Experts suggest exposure in dividend-paying stocks should be in matured names which have stood economic downturns coupled with the consistent payout on a periodic basis, and the right allocation could be about 25 percent of the total equity portfolio.
“One should consider 25 percent allocation towards high dividend paying stocks as the dividend income up to Rs 10 lakh is totally tax-free. Dividend income is more predictable whereas capital appreciation is less certain,” Prakash Pandey, Head -Research, Fairwealth Securities told Moneycontrol.
“High growth rate is a priority for the majority. But, investors need to have a balanced portfolio. Before buying any high dividend paying stock, always consider the consolidated debt of that company, and don’t forget to do due diligence,” he said.
What to buy?
Investors should consider only those stocks that have a consistent record of paying dividends on a long-term basis and should be supported with robust financials.
“A company which manages to pay dividend consistently on a periodic basis, and with high dividend yield can form a part of the dividend paying portfolio. This name includes Coal India, ONGC, HPCL, HUL, ITC, IOC, and so on,” said Rohira.
“These stocks form an important part of the portfolio that gives stability during difficult economic condition, diversification in the portfolio, and timely inflow that enable to create wealth on a long-term basis,” he said.
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