High-dividend stocks seem safe bet in times of uncertainty; which one should you buy?

Dividend yield (%) is the dividend per share paid by a company (on annual basis) divided by the price of that particular company/stock.

“We believe investing some of the corpus in high dividend-yield paying companies with strong fundamentals can cushion investors’ portfolios in case of an event of a fall but only to an extent,” Ajit Mishra, VP Research, Religare Broking told Moneycontrol.

“Most of these high dividend-paying companies have healthy cash reserves which could be utilized for paying dividends in difficult times as well when the core businesses get impacted,” he said.

Mishra further added that many of these stocks like Oil India and REC have decent fundamentals and therefore can be considered for long-term, assuming that these companies will continue with the current dividend rate.

India market plunged by about 30 percent since January 30 when benchmark indices hit a fresh record high amid the outbreak of COVID-19. The volatility as measured by India VIX has surpassed levels seen during the 2008 global financial crisis.

As many as 24 constituent companies in the Nifty have announced interim dividends so far in the year, according to a media report, as compared to 15 in the year-ago period.

Markets are in grip of risk aversion due to the spread of coronavirus pandemic. Post the Rs 1.7 lakh cr stimulus unveiled by the finance minister, expectations ate running high from the Reserve Bank of India to slash interest rates by 25-50 bps.

“High dividend yield stocks are worth investing in wake of falling interest rate scenario, but it must be remembered that only those high dividend-yielding stocks which have given the capital appreciation in recent past should be looked into,” Pankaj Bobade, Fundamental Research head, Axis Securities Limited told Moneycontrol.

“There have been instances of loss of invested capital, hence the investor must ensure that he should not end up into value trap in pursuit of high dividend,” he said. Bobade further added that investors should check the source of cash used for a dividend to ensure that the business generates sufficient cash for dividend distribution.

What should investors do now?

Investment in high dividend yield stocks is often seen as a way of safeguarding your investments in case of low capital appreciation as it provides consistent income. However, in case of an economic downturn only select few are better bets.

“Investors should analyze the components of dividend yield relatively i.e. the movement in the yield is not caused due to change in one single component,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.

“In normal circumstances, high dividend-yielding stocks are a great choice however during the price drop or economic recession companies may reduce the dividend or stop it altogether. Therefore it is quite unlikely that it will provide significant cushion to investor’s portfolio,” he said.

Mishra of Religare Broking said that in a volatile market scenario, where most of these stocks are trading at a 52-week low, the dividend yield of the stocks has increased and is currently higher than the prevailing interest rate.

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