Rally a worry? Play safe with high dividend-yield stocks

An analysis of BSE 500 companies shows a number of them offering investors an attractive dividend yield of over 4%, which could be a good defensive strategy at a time when there are worries lingering over the run-up in the markets. Several banks figure on the list of stocks offering high dividend yield despite their need to often maintain capital adequacy.

“Companies that are paying such high dividend generally have strong fundamentals. So, investors investing in such companies will not only receive high dividend, but make reasonable capital gains on such investment,” said Jaganadham Thunuguntla, chief equity strategist, SMC Global Securities.

But investors need to exercise caution while choosing such stocks, as they could underperform on the bourses due to several reasons. “It’s important to note that dividend yields are high due to low valuations, which, in turn, are due to poor growth prospects,” said Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services.




High-yielding stocks in industries or sectors with poor earnings visibility are best avoided, he said. Unless economic growth picks up significantly, PSU banks with a high level of bad loans should be avoided, said Vikram Dhawan, director, Equentis Capital. "If a PSU bank stock with an attractive dividend yield currently were to face continuing asset quality concerns in the next few quarters, its dividend yield will decline in FY15," said Vijaykumar of Geojit.

Analysts said investors should also take into account the quarterly and annual financial performance of companies as well as growth factors before investing, since dividends are paid out of profits from regular business.

"It appears that economic cycle may have bottomed out in India, but the impact of an improving macro may only be visible after 2-3 quarters. With elections round the corner, the event risk is too high for pure dividend play and does not work favourably in terms of risk-reward ratio," said Equentis’ Vikram. Thus, instead of going in for pure dividend play, investors should rather look for growth prospects supported by attractive yield.