Buy, sell, hold: Dividend yield of a stock can help you with your investment decision

Investors generally use the Sensex PE to time the market. However, a spike in the Sensex PE and lack of any clear indication from the PB ratio, brings the dividend yield into focus.

ET Wealth finds that the Sensex dividend yield (annual dividend as a percentage of the share price), continues to be a good indicator. A high dividend yield is a signal for investors to buy, while a low yield means sell.




Time to rely more on dividend yield

These signals have worked well in the past
Though the Sensex is expensive at present, it is not as expensive as the PE ratio suggests.

Utility of Sensex PE has reduced
Sensex PE has become less useful due to a sudden spike thanks to Tata Motors reporting huge losses.

Valuations are not at all time highs
While Sensex PE is above 3 SD and is close to a 15-year high, valuations are not that alarmingly expensive.

Note: Current high PE is also due to very low corporate earnings growth; not a market peak signal

Composition changes have cut usefulness of PB
Sensex PB became less useful because of the changes in its composition.

Note: PB will be low when the components are banks or manufacturing cos with large asset base vs IT or FMCG with low asset base